Hydrodynamic limit of order book dynamics

Xuefeng Gao and S. J. Deng

Papers from arXiv.org

Abstract: In this paper, we establish a fluid limit for a two--sided Markov order book model. Our main result states that in a certain asymptotic regime, a pair of measure-valued processes representing the "sell-side shape" and "buy-side shape" of an order book converges to a pair of deterministic measure-valued processes in a certain sense. We also test our fluid approximation on data. The empirical results suggest that the approximation is reasonably good for liquidly--traded stocks in certain time periods.

Date: 2014-11, Revised 2016-02
New Economics Papers: this item is included in nep-mst
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