Stochastic simulation framework for the limit order book using liquidity-motivated agents

Efstathios Panayi () and Gareth W. Peters
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Efstathios Panayi: Department of Computer Science, WC1E 6EA, London, UK
Gareth W. Peters: Department of Statistical Science, WC1E 7HB, London, UK

International Journal of Financial Engineering (IJFE), 2015, vol. 02, issue 02, 1-52

Abstract: In this paper, we develop a new form of simulation model for limit order books based on heterogeneous trading agents, whose motivations are liquidity driven. These agents are abstractions of real market participants, expressed in a stochastic model framework. We develop an efficient way to perform statistical calibration of the model parameters on Level 2 limit order book data from Chi-X, based on a combination of indirect inference and multi-objective optimization. We then demonstrate how such a modeling framework can be of use in testing exchange regulations, as well as informing brokerage decisions and other trading based scenarios.

Keywords: Limit order book; simulation model; copula dependence; exchange regulation; C15; C63; G18 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S2424786315500139

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