Modelling Asset Prices for Algorithmic and High-Frequency Trading

Álvaro Cartea () and Sebastian Jaimungal

Applied Mathematical Finance, 2013, vol. 20, issue 6, 512-547

Abstract: Algorithmic trading (AT) and high-frequency (HF) trading, which are responsible for over 70% of US stocks trading volume, have greatly changed the microstructure dynamics of tick-by-tick stock data. In this article, we employ a hidden Markov model to examine how the intraday dynamics of the stock market have changed and how to use this information to develop trading strategies at high frequencies. In particular, we show how to employ our model to submit limit orders to profit from the bid-ask spread, and we also provide evidence of how HF traders may profit from liquidity incentives (liquidity rebates). We use data from February 2001 and February 2008 to show that while in 2001 the intraday states with the shortest average durations (waiting time between trades) were also the ones with very few trades, in 2008 the vast majority of trades took place in the states with the shortest average durations. Moreover, in 2008, the states with the shortest durations have the smallest price impact as measured by the volatility of price innovations.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://hdl.handle.net/10.1080/1350486X.2013.771515 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:20:y:2013:i:6:p:512-547

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/1350486X.2013.771515

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().