Modelling the shape of the limit order book

Federico Platania, Pedro Serrano and Mikel Tapia

Quantitative Finance, 2018, vol. 18, issue 9, 1575-1597

Abstract: This article develops a parsimonious way to use the shape of the limit order book to produce an estimate of the asset price. The posited model captures and describes the evolution of the distribution of limit orders on the bid and ask sides of the LOB during the trading session and provides estimates of the execution asset price over time. The performance of the model is evaluated against some existing standards from the market microstructure literature during the trading session. Empirical evidence on listed companies confirm a strong contribution of our methodology to the innovation in asset prices, according to the information share coefficients. We also document a significant improvement relative to the Hasbrouck [J. Finance, 1991, 46, 179–207] model when our model estimates are included as regressors.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:18:y:2018:i:9:p:1575-1597

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DOI: 10.1080/14697688.2018.1433312

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