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A reduced-form model for level-1 limit order books

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  • Tzu-Wei Yang
  • Lingjiong Zhu

Abstract

One popular approach to model the limit order books dynamics of the best bid and ask at level-1 is to use the reduced-form diffusion approximations. It is well known that the biggest contributing factor to the price movement is the imbalance of the best bid and ask. We investigate the data of the level-1 limit order books of a basket of stocks and study the numerical evidence of drift, correlation, volatility and their dependence on the imbalance. Based on the numerical discoveries, we develop a nonparametric discrete model for the dynamics of the best bid and ask, which can be approximated by a reduced-form model with analytical tractability that can fit the empirical data of correlation, volatilities and probability of price movement simultaneously.

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  • Tzu-Wei Yang & Lingjiong Zhu, 2015. "A reduced-form model for level-1 limit order books," Papers 1508.07891, arXiv.org, revised Nov 2016.
    • Handle: RePEc:arx:papers:1508.07891
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    References listed on IDEAS

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    Cited by:

    1. Faisal I Qureshi, 2018. "Investigating Limit Order Book Characteristics for Short Term Price Prediction: a Machine Learning Approach," Papers 1901.10534, arXiv.org.

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