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The statistical significance of multivariate Hawkes processes fitted to limit order book data

Roger Martins and Dieter Hendricks

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Abstract: Hawkes processes have seen a number of applications in finance, due to their ability to capture event clustering behaviour typically observed in financial systems. Given a calibrated Hawkes process, of concern is the statistical fit to empirical data, particularly for the accurate quantification of self- and mutual-excitation effects. We investigate the application of a multivariate Hawkes process with a sum-of-exponentials kernel and piecewise-linear exogeneity factors, fitted to liquidity demand and replenishment events extracted from limit order book data. We consider one-, two- and three-exponential kernels, applying various tests to ascertain goodness-of-fit and stationarity of residuals, as well as stability of the calibration procedure. In line with prior research, it is found that performance across all tests improves as the number of exponentials is increased, with a sum-of-three-exponentials yielding the best fit to the given set of coupled point processes.

New Economics Papers: this item is included in nep-pke
Date: 2016-04, Revised 2016-04
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Handle: RePEc:arx:papers:1604.01824