Search results for "Quantitative Finance - Trading and Market Microstructure"
showing 10 items of 20 documents
Initial Enlargement in a Markov chain market model
2011
Enlargement of filtrations is a classical topic in the general theory of stochastic processes. This theory has been applied to stochastic finance in order to analyze models with insider information. In this paper we study initial enlargement in a Markov chain market model, introduced by Norberg. In the enlarged filtration, several things can happen: some of the jumps times can be accessible or predictable, but in the original filtration all the jumps times are totally inaccessible. But even if the jumps times change to accessible or predictable, the insider does not necessarily have arbitrage possibilities.
Market reaction to temporary liquidity crises and the permanent market impact
2006
We study the relaxation dynamics of the bid-ask spread and of the midprice after a sudden, large variation of the spread, corresponding to a temporary crisis of liquidity in a double auction financial market. We find that the spread decays very slowly to its normal value as a consequence of the strategic limit order placement of liquidity providers. We consider several quantities, such as order placement rates and distribution, that affect the decay of the spread. We measure the permanent impact both of a generic event altering the spread and of a single transaction and we find an approximately linear relation between immediate and permanent impact in both cases.
The limit order book on different time scales
2007
Financial markets can be described on several time scales. We use data from the limit order book of the London Stock Exchange (LSE) to compare how the fluctuation dominated microstructure crosses over to a more systematic global behavior.
Modeling FX market activity around macroeconomic news: a Hawkes process approach
2014
We present a Hawkes model approach to foreign exchange market in which the high frequency price dynamics is affected by a self exciting mechanism and an exogenous component, generated by the pre-announced arrival of macroeconomic news. By focusing on time windows around the news announcement, we find that the model is able to capture the increase of trading activity after the news, both when the news has a sizeable effect on volatility and when this effect is negligible, either because the news in not important or because the announcement is in line with the forecast by analysts. We extend the model by considering non-causal effects, due to the fact that the existence of the news (but not i…
How markets slowly digest changes in supply and demand
2008
In this article we revisit the classic problem of tatonnement in price formation from a microstructure point of view, reviewing a recent body of theoretical and empirical work explaining how fluctuations in supply and demand are slowly incorporated into prices. Because revealed market liquidity is extremely low, large orders to buy or sell can only be traded incrementally, over periods of time as long as months. As a result order flow is a highly persistent long-memory process. Maintaining compatibility with market efficiency has profound consequences on price formation, on the dynamics of liquidity, and on the nature of impact. We review a body of theory that makes detailed quantitative pr…
Patterns of trading profiles at the Nordic Stock Exchange. A correlation-based approach.
2016
We investigate the trading behavior of Finnish individual investors trading the stocks selected to compute the OMXH25 index in 2003 by tracking the individual daily investment decisions. We verify that the set of investors is a highly heterogeneous system under many aspects. We introduce a correlation based method that is able to detect a hierarchical structure of the trading profiles of heterogeneous individual investors. We verify that the detected hierarchical structure is highly overlapping with the cluster structure obtained with the approach of statistically validated networks when an appropriate threshold of the hierarchical trees is used. We also show that the combination of the cor…
Trading activity and price impact in parallel markets: SETS vs. off-book market at the London Stock Exchange
2011
We empirically study the trading activity in the electronic on-book segment and in the dealership off-book segment of the London Stock Exchange, investigating separately the trading of active market members and of other market participants which are non-members. We find that (i) the volume distribution of off-book transactions has a significantly fatter tail than the one of on-book transactions, (ii) groups of members and non-members can be classified in categories according to their trading profile (iii) there is a strong anticorrelation between the daily inventory variation of a market member due to the on-book market transactions and inventory variation due to the off-book market transac…
Diffusive behavior and the modeling of characteristic times in limit order executions
2007
We present an empirical study of the first passage time (FPT) of order book prices needed to observe a prescribed price change Delta, the time to fill (TTF) for executed limit orders and the time to cancel (TTC) for canceled ones in a double auction market. We find that the distribution of all three quantities decays asymptotically as a power law, but that of FPT has significantly fatter tails than that of TTF. Thus a simple first passage time model cannot account for the observed TTF of limit orders. We propose that the origin of this difference is the presence of cancellations. We outline a simple model, which assumes that prices are characterized by the empirically observed distribution …
Limit order placement as an utility maximization problem and the origin of power law distribution of limit order prices
2006
I consider the problem of the optimal limit order price of a financial asset in the framework of the maximization of the utility function of the investor. The analytical solution of the problem gives insight on the origin of the recently empirically observed power law distribution of limit order prices. In the framework of the model, the most likely proximate cause of this power law is a power law heterogeneity of traders' investment time horizons .
How does the market react to your order flow?
2012
We present an empirical study of the intertwined behaviour of members in a financial market. Exploiting a database where the broker that initiates an order book event can be identified, we decompose the correlation and response functions into contributions coming from different market participants and study how their behaviour is interconnected. We find evidence that (1) brokers are very heterogeneous in liquidity provision -- some are consistently liquidity providers while others are consistently liquidity takers. (2) The behaviour of brokers is strongly conditioned on the actions of {\it other} brokers. In contrast brokers are only weakly influenced by the impact of their own previous ord…