Order Book Dynamics with Liquidity Fluctuations: Asymptotic Analysis of Highly Competitive Regime

Helder Rojas, Artem Logachov () and Anatoly Yambartsev
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Helder Rojas: Department of Statistical Engineering, National Engineering University (UNI), Lima 15333, Peru
Artem Logachov: Laboratory of Probability and Mathematical Statistics, Sobolev Institute of Mathematics, Siberian Branch of the Russian Academy of Science, 630090 Novosibirsk, Russia
Anatoly Yambartsev: Department of Statistics, Institute of Mathematics and Statistics, University of São Paulo (USP), São Paulo 05508-220, Brazil

Mathematics, 2023, vol. 11, issue 20, 1-24

Abstract: We introduce a class of Markov models to describe the bid–ask price dynamics in the presence of liquidity fluctuations. In a highly competitive regime, the spread evolution belongs to a class of Markov processes known as a population process with uniform catastrophes. Our mathematical analysis focuses on establishing the law of large numbers, the central limit theorem, and large deviations for this catastrophe-based model. Large deviation theory allows us to illustrate how huge deviations in the spread and prices can occur in the model. Moreover, our research highlights how these local trends and volatility are influenced by the typical values of the bid–ask spread. We calibrated the model parameters using available high-frequency data and conducted Monte Carlo numerical simulations to demonstrate its ability to reasonably replicate key phenomena in the presence of liquidity fluctuations.

Keywords: limit order book; liquidity fluctuations; Markov process; large deviations; flash crash (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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