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Modeling bid and ask price dynamics with an extended Hawkes process and its empirical applications for high-frequency stock market data

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  • Kyungsub Lee
  • Byoung Ki Seo

Abstract

This study proposes a versatile model for the dynamics of the best bid and ask prices using an extended Hawkes process. The model incorporates the zero intensities of the spread-narrowing processes at the minimum bid-ask spread, spread-dependent intensities, possible negative excitement, and nonnegative intensities. We apply the model to high-frequency best bid and ask price data from US stock markets. The empirical findings demonstrate a spread-narrowing tendency, excitations of the intensities caused by previous events, the impact of flash crashes, characteristic trends in fast trading over time, and the different features of market participants in the various exchanges.

Suggested Citation

  • Kyungsub Lee & Byoung Ki Seo, 2022. "Modeling bid and ask price dynamics with an extended Hawkes process and its empirical applications for high-frequency stock market data," Papers 2201.10173, arXiv.org.
    • Handle: RePEc:arx:papers:2201.10173
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    File URL: http://arxiv.org/pdf/2201.10173
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    References listed on IDEAS

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    1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
    2. Eric M. Aldrich & Daniel Friedman, 2023. "Order Protection Through Delayed Messaging," Management Science, INFORMS, vol. 69(2), pages 774-790, February.
    3. Marco Avellaneda & Sasha Stoikov, 2008. "High-frequency trading in a limit order book," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 217-224.
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    Cited by:

    1. Jain, Konark & Firoozye, Nick & Kochems, Jonathan & Treleaven, Philip, 2024. "Limit Order Book dynamics and order size modelling using Compound Hawkes Process," Finance Research Letters, Elsevier, vol. 69(PA).
    2. Kyungsub Lee, 2023. "Multi-kernel property in high-frequency price dynamics under Hawkes model," Papers 2302.11822, arXiv.org.
    3. Kyungsub Lee, 2022. "Application of Hawkes volatility in the observation of filtered high-frequency price process in tick structures," Papers 2207.05939, arXiv.org, revised Sep 2024.
    4. Lee Kyungsub, 2024. "Multi-kernel property in high-frequency price dynamics under Hawkes model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 28(4), pages 605-624.

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