nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒08‒13
four papers chosen by
Thanos Verousis

  1. Order Flows and Limit Order Book Resiliency on the Meso-Scale By Kyle Bechler; Michael Ludkovski
  2. Sure profits via flash strategies and the impossibility of predictable jumps By Claudio Fontana; Markus Pelger; Eckhard Platen
  3. Machine learning in sentiment reconstruction of the simulated stock market By Mikhail Goykhman; Ali Teimouri
  4. Nonlinear price impact from linear models By Felix Patzelt; Jean-Philippe Bouchaud

  1. By: Kyle Bechler; Michael Ludkovski
    Abstract: We investigate the behavior of limit order books on the meso-scale motivated by order execution scheduling algorithms. To do so we carry out empirical analysis of the order flows from market and limit order submissions, aggregated from tick-by-tick data via volume-based bucketing, as well as various LOB depth and shape metrics. We document a nonlinear relationship between trade imbalance and price change, which however can be converted into a linear link by considering a weighted average of market and limit order flows. We also document a hockey-stick dependence between trade imbalance and one-sided limit order flows, highlighting numerous asymmetric effects between the active and passive sides of the LOB. To address the phenomenological features of price formation, book resilience, and scarce liquidity we apply a variety of statistical models to test for predictive power of different predictors. We show that on the meso-scale the limit order flows (as well as the relative addition/cancellation rates) carry the most predictive power. Another finding is that the deeper LOB shape, rather than just the book imbalance, is more relevant on this timescale. The empirical results are based on analysis of six large-tick assets from Nasdaq.
    Date: 2017–08
  2. By: Claudio Fontana; Markus Pelger; Eckhard Platen
    Abstract: In an arbitrage-free financial market, asset prices should not exhibit jumps of a predictable magnitude at predictable times. We provide a rigorous formulation of this result in a fully general setting, only allowing for buy-and-hold positions and without imposing any semimartingale restriction. We show that asset prices do not exhibit predictable jumps if and only if there is no possibility of obtaining sure profits via high-frequency limits of buy-and-hold trading strategies. Our results imply that, under minimal assumptions, price changes occurring at scheduled dates should only be due to unanticipated information releases.
    Date: 2017–08
  3. By: Mikhail Goykhman; Ali Teimouri
    Abstract: In this paper we continue the study of the simulated stock market framework defined by the driving sentiment processes. We focus on the market environment driven by the buy/sell trading sentiment process of the Markov chain type. We apply the methodology of the Hidden Markov Models and the Recurrent Neural Networks to reconstruct the transition probabilities matrix of the Markov sentiment process and recover the underlying sentiment states from the observed stock price behavior.
    Date: 2017–08
  4. By: Felix Patzelt; Jean-Philippe Bouchaud
    Abstract: The impact of trades on asset prices is a crucial aspect of market dynamics for academics, regulators and practitioners alike. Recently, universal and highly nonlinear master curves were observed for price impacts aggregated on all intra-day scales [1]. Here we investigate how well these curves, their scaling, and the underlying return dynamics are captured by linear "propagator" models. We find that the classification of trades as price-changing versus non-price-changing can explain the price impact nonlinearities and short-term return dynamics to a very high degree. The explanatory power provided by the change indicator in addition to the order sign history increases with increasing tick size. To obtain these results, several long-standing technical issues for model calibration and -testing are addressed. We present new spectral estimators for two- and three-point cross-correlations, removing the need for previously used approximations. We also show when calibration is unbiased and how to accurately reveal previously overlooked biases. Therefore, our results contribute significantly to understanding both recent empirical results and the properties of a popular class of impact models.
    Date: 2017–08

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