Market Influence and Order Book Strategies
I review in this paper1 my findings on order driven market modeling. Following my previous works on robust agents based modeling in finance [1, 2, 3,5], I study specific characteristics of order book markets. By controlling the descriptive time scale of the dynamics involved, I show how market impact, linear by definition, and trading strategies lead to precise pictures for clarifying order book dynamics, consistent with what is observed empirically. I then discuss more specifically the role of market impact in the created dynamics and structure of the book and the economic implications of my studies.
The article is organized as follows. In Sect. 1, I describe financial market dynamics in an agent-based market model that clarifies the role of volatility in characteristics observed on a wide range of descriptive time scales. I define in Sect. 2 the limit order book model, agents’ strategies, and link liquidity provision to volatility estimates. I focus the analysis on the dynamics and structures of the book in Sect. 3. I discuss the economic implications of the results and draw conclusions in the last sections.
KeywordsExcess Demand Limit Order Order Book Market Order Market Impact
Unable to display preview. Download preview PDF.
- 1.F. Ghoulmié. Statistical mechanics of adaptive agents in socio-economic systems. PhD thesis. Ecole Normale Supérieure. 2005Google Scholar
- 2.F. Ghoulmié, R. Cont, J.-P. Nadal, Heterogeneity and feedback in an agent-based market model, Journal of Physics C, 17, p. S1259–S1268, 2005Google Scholar
- 3.F. Ghoulmié et al. Effects of diversification among assets in an agent-based market model, Proceeding to the 2007 SPIE conference on Complex Systems in CanberraGoogle Scholar
- 4.J.C. Hull, Options, futures, and other derivatives, 6th edition, Prentice HallGoogle Scholar
- 6.J.-P. Bouchaud, J.D. Farmer, F. Lillo, How markets slowly digest changes in supply and demand, 2008. arXiv:0809.0822v1Google Scholar
- 10.Lillo et al., Statistical identification with hidden Markov models of large order splitting strategies in an equity market, 2010Google Scholar
- 11.F. Ghoulmié. Order Book Market Complexity, 2010Google Scholar
- 12.J.-P. Bouchaud, Price impact, 2009Google Scholar