Price dynamics in a Markovian limit order market

Rama Cont and Adrien De Larrard

Papers from arXiv.org

Abstract: We propose and study a simple stochastic model for the dynamics of a limit order book, in which arrivals of market order, limit orders and order cancellations are described in terms of a Markovian queueing system. Through its analytical tractability, the model allows to obtain analytical expressions for various quantities of interest such as the distribution of the duration between price changes, the distribution and autocorrelation of price changes, and the probability of an upward move in the price, {\it conditional} on the state of the order book. We study the diffusion limit of the price process and express the volatility of price changes in terms of parameters describing the arrival rates of buy and sell orders and cancelations. These analytical results provide some insight into the relation between order flow and price dynamics in order-driven markets.

Date: 2011-04
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published in SIAM Journal on Financial Mathematics, Vol 4, No 1, 1-25 (2013)

Downloads: (external link)
http://arxiv.org/pdf/1104.4596 Latest version (application/pdf)

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:arx:papers:1104.4596

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().