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Market Impact in a Latent Order Book

Ismael Lemhadri

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Abstract: The latent order book of \cite{donier2015fully} is one of the most promising agent-based models for market impact. This work extends the minimal model by allowing agents to exhibit mean-reversion, a commonly observed pattern in real markets. This modification leads to new order book dynamics, which we explicitly study and analyze. Underlying our analysis is a mean-field assumption that views the order book through its \textit{average} density. We show how price impact develops in this new model, providing a flexible family of solutions that can potentially improve calibration to real data. While no closed-form solution is provided, we complement our theoretical investigation with extensive numerical results, including a simulation scheme for the entire order book.

Date: 2018-02, Revised 2020-09
New Economics Papers: this item is included in nep-hme and nep-mst
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Published in Market Microstructure and Liquidity 2020

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