6533b86efe1ef96bd12cc93a
RESEARCH PRODUCT
Market reaction to a bid-ask spread change: a power-law relaxation dynamics.
Adam PonziRosario N. MantegnaFabrizio LilloFabrizio Lillosubject
Computer Science::Computer Science and Game TheoryActuarial scienceStochastic processFinancial marketmicrostructureFinancial markets microstructure stochastic processes relaxation phenomenarelaxation phenomenaFinancial marketPower lawMarket liquiditystochastic processeBid–ask spreadOrder (exchange)EconometricsEconomicsDouble auctionRelaxation (approximation)description
We study the relaxation dynamics of the bid-ask spread and of the midprice after a sudden variation of the spread in a double auction financial market. We find that the spread decays as a power law to its normal value. We measure the price reversion dynamics and the permanent impact, i.e., the long-time effect on price, of a generic event altering the spread and we find an approximately linear relation between immediate and permanent impact. We hypothesize that the power-law decay of the spread is a consequence of the strategic limit order placement of liquidity providers. We support this hypothesis by investigating several quantities, such as order placement rates and distribution of prices and times of submitted orders, which affect the decay of the spread.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2009-01-01 | Physical review. E, Statistical, nonlinear, and soft matter physics |