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Stochastic simulation framework for the limit order book using liquidity-motivated agents

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  • Efstathios Panayi

    (Department of Computer Science, WC1E 6EA, London, UK)

  • Gareth W. Peters

    (Department of Statistical Science, WC1E 7HB, London, UK)

Abstract

In this paper, we develop a new form of simulation model for limit order books based on heterogeneous trading agents, whose motivations are liquidity driven. These agents are abstractions of real market participants, expressed in a stochastic model framework. We develop an efficient way to perform statistical calibration of the model parameters on Level 2 limit order book data from Chi-X, based on a combination of indirect inference and multi-objective optimization. We then demonstrate how such a modeling framework can be of use in testing exchange regulations, as well as informing brokerage decisions and other trading based scenarios.

Suggested Citation

  • Efstathios Panayi & Gareth W. Peters, 2015. "Stochastic simulation framework for the limit order book using liquidity-motivated agents," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(02), pages 1-52.
    • Handle: RePEc:wsi:ijfexx:v:02:y:2015:i:02:n:s2424786315500139
    DOI: 10.1142/S2424786315500139
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    3. Zijian Shi & John Cartlidge, 2023. "Neural Stochastic Agent-Based Limit Order Book Simulation: A Hybrid Methodology," Papers 2303.00080, arXiv.org.

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    More about this item

    Keywords

    Limit order book; simulation model; copula dependence; exchange regulation; C15; C63; G18;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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