Limit Order Book and its modelling in terms of Gibbs Grand-Canonical Ensemble

Alberto Bicci

Papers from arXiv.org

Abstract: In the domain of the so called Econophysics some attempts already have been made for applying the theory of Thermodynamics and Statistical Mechanics to economics and financial markets. In this paper a similar approach is made from a different perspective, trying to model the limit order book and price formation process of a given stock by the Grand-Canonical Gibbs Ensemble for the bid and ask processes. As a consequence we can define in a meaningful way expressions for the temperatures of the ensembles of bid orders and of ask orders, which are a function of maximum bid, minimum ask and closure prices of the stock as well as of the exchanged volume of shares. It is demonstrated that the difference between the ask and bid orders temperatures can be related to the VAO (Volume Accumulation Oscillator) indicator, empirically defined in Technical Analysis of stock markets. Furthermore the distributions for bid and ask orders derived by the theory can be subject to well defined validations against real data, giving a falsifiable character to the model.

Date: 2016-01, Revised 2016-02
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1602.06968 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:1602.06968

Access Statistics for this paper

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