 Limit Order Book dynamics and order size modelling using Compound Hawkes ProcessKonark Jain, Nikan Firoozye, Jonathan Kochems and Philip Treleaven Finance Research Letters, 2024, vol. 69, issue PA Abstract: Hawkes Process has been used to model Limit Order Book (LOB) dynamics in several ways in the literature however the focus has been limited to capturing the inter-event times while the order size is usually assumed to be constant. We propose a novel methodology of using Compound Hawkes Process for the LOB where each event has an order size sampled from a calibrated distribution. The process is formulated in a novel way such that the spread of the process always remains positive. Further, we condition the model parameters on time of day to support empirical observations. We make use of an enhanced non-parametric method to calibrate the Hawkes kernels and allow for inhibitory cross-excitation kernels. We showcase the results and quality of fits for an equity stock’s LOB in the NASDAQ exchange and compare them against several baselines. Finally, we conduct a market impact study of the simulator and show the empirical observation of a concave market impact function is indeed replicated. Keywords: Limit order book; Microstructure; Financial simulations; Hawkes process (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:69:y:2024:i:pa:s1544612324011863 DOI: 10.1016/j.frl.2024.106157 Access Statistics for this article Finance Research Letters is currently edited by R. Gençay More articles in Finance Research Letters from Elsevier |
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