| Abstract: |
This paper presents a novel model for simulating and analyzing sparse limit
order books (LOBs), with a specific application to the European intraday
electricity market. In illiquid markets, characterized by significant gaps
between order levels due to sparse trading volumes, traditional LOB models
often fall short. Our approach utilizes an inhomogeneous Poisson process to
accurately capture the sporadic nature of order arrivals and cancellations on
both the bid and ask sides of the book. By applying this model to the intraday
electricity market, we gain insights into the unique microstructural behaviors
and challenges of this dynamic trading environment. The results offer valuable
implications for market participants, enhancing their understanding of LOB
dynamics in illiquid markets. This work contributes to the broader field of
market microstructure by providing a robust framework adaptable to various
illiquid market settings beyond electricity trading. |