nep-mst New Economics Papers
on Market Microstructure
Issue of 2023‒02‒13
two papers chosen by
Thanos Verousis

  1. Asynchronous Deep Double Duelling Q-Learning for Trading-Signal Execution in Limit Order Book Markets By Peer Nagy; Jan-Peter Calliess; Stefan Zohren
  2. High-frequency realized stochastic volatility model By Watanabe, Toshiaki; Nakajima, Jouchi

  1. By: Peer Nagy; Jan-Peter Calliess; Stefan Zohren
    Abstract: We employ deep reinforcement learning (RL) to train an agent to successfully translate a high-frequency trading signal into a trading strategy that places individual limit orders. Based on the ABIDES limit order book simulator, we build a reinforcement learning OpenAI gym environment and utilise it to simulate a realistic trading environment for NASDAQ equities based on historic order book messages. To train a trading agent that learns to maximise its trading return in this environment, we use Deep Duelling Double Q-learning with the APEX (asynchronous prioritised experience replay) architecture. The agent observes the current limit order book state, its recent history, and a short-term directional forecast. To investigate the performance of RL for adaptive trading independently from a concrete forecasting algorithm, we study the performance of our approach utilising synthetic alpha signals obtained by perturbing forward-looking returns with varying levels of noise. Here, we find that the RL agent learns an effective trading strategy for inventory management and order placing that outperforms a heuristic benchmark trading strategy having access to the same signal.
    Date: 2023–01
  2. By: Watanabe, Toshiaki; Nakajima, Jouchi
    Abstract: A new high-frequency realized stochastic volatility model is proposed. Apart from the standard daily-frequency stochastic volatility model, the high-frequency stochastic volatility model is fit to intraday returns by extensively incorporating intraday volatility patterns. The daily realized volatility calculated using intraday returns is incorporated into the high-frequency stochastic volatility model by considering the bias in the daily realized volatility caused by microstructure noise. The volatility of intraday returns is assumed to consist of the autoregressive process, the seasonal component of the intraday volatility pattern, and the announcement component responding to macroeconomic announcements. A Bayesian method via Markov chain Monte Carlo is developed for the analysis of the proposed model. The empirical analysis using the 5-minute returns of E-mini S&P 500 futures provides evidence that our high-frequency realized stochastic volatility model improves in-sample model fit and volatility forecasting over the existing models.
    Keywords: Bayesian analysis, High-frequency data, Markov chain Monte Carlo, Realized volatility, Stochastic volatility model, Volatility forecasting
    JEL: C22 C53 C58 G17
    Date: 2023–01

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