How does latent liquidity get revealed in the limit order book?

Lorenzo Dall’amico, Antoine Fosset, Jean-Philippe Bouchaud () and Michael Benzaquen ()
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Lorenzo Dall’amico: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Antoine Fosset: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Jean-Philippe Bouchaud: SPEC - UMR3680 - Service de physique de l'état condensé - IRAMIS - Institut Rayonnement Matière de Saclay (DRF) - CEA - Commissariat à l'énergie atomique et aux énergies alternatives - Université Paris-Saclay - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique
Michael Benzaquen: LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique

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Abstract: Latent order book models have allowed for significant progress in our understanding of price formation in financial markets. In particular they are able to reproduce a number of stylized facts, such as the square-root impact law. An important question that is raised-if one is to bring such models closer to real market data-is that of the connection between the latent (unobservable) order book and the real (observable) order book. Here we suggest a simple, consistent mechanism for the revelation of latent liquidity that allows for quantitative estimation of the latent order book from real market data. We successfully confront our results to real order book data for over a hundred assets and discuss market stability. One of our key theoretical results is the existence of a market instability threshold, where the conversion of latent order becomes too slow, inducing liquidity crises. Finally we compute the price impact of a metaorder in different parameter regimes.

Keywords: models of financial markets; market impact; market microstructure; quantitative finance; agent-based models (search for similar items in EconPapers)
Date: 2019-01-01
New Economics Papers: this item is included in nep-mst
Note: View the original document on HAL open archive server: https://hal.science/hal-02323373
References: View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Published in Journal of Statistical Mechanics: Theory and Experiment, 2019, 2019 (1), pp.013404. ⟨10.1088/1742-5468/aaf10e⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02323373

DOI: 10.1088/1742-5468/aaf10e

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