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Hawkes model for price and trades high-frequency dynamics

Emmanuel Bacry and Jean-François Muzy

Quantitative Finance, 2014, vol. 14, issue 7, 1147-1166

Abstract: We introduce a multivariate Hawkes process that accounts for the dynamics of market prices through the impact of market order arrivals at microstructural level. Our model is a point process mainly characterized by four kernels associated with, respectively, the trade arrival self-excitation, the price changes mean reversion, the impact of trade arrivals on price variations and the feedback of price changes on trading activity. It allows one to account for both stylized facts of market price microstructure (including random time arrival of price moves, discrete price grid, high-frequency mean reversion, correlation functions behaviour at various time scales) and the stylized facts of market impact (mainly the concave-square-root-like/relaxation characteristic shape of the market impact of a meta-order). Moreover, it allows one to estimate the entire market impact profile from anonymous market data. We show that these kernels can be empirically estimated from the empirical conditional mean intensities. We provide numerical examples, application to real data and comparisons to former approaches.

Date: 2014
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