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HYDRODYNAMIC LIMIT OF ORDER-BOOK DYNAMICS

Published online by Cambridge University Press:  28 November 2016

Xuefeng Gao  and
S.J. Deng
Xuefeng Gao
Affiliation:
Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong E-mail:xfgao@se.cuhk.edu.hk
S.J. Deng
Affiliation:
H. Milton Stewart School of Industrial and Systems Engineering, Georgia Institute of Technology, Atlanta, GA 30332, USA E-mail:deng@isye.gatech.edu
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Abstract

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In this paper, we establish a fluid limit for a two-sided Markov order book model. The 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 the fluid approximation on data. The empirical results suggest that the approximation is reasonably good for liquidly traded stocks in certain time periods.

Keywords

applied probabilitymathematical financequeueing theorystochastic modeling
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 32 , Issue 1 , January 2018 , pp. 96 - 125
Copyright
Copyright © Cambridge University Press 2016 

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