Simulation of a Limit Order Driven Market

Abstract

This article presents an order flow model framework for limit order driven markets. Different from previous models, the article explicitly models a reference price process that “sweeps” the limit order book as it fluctuates up and down. This framework allows the use of any stochastic process to model this reference price and very general specifications of the limit order flow. The authors believe that this framework can fruitfully combine order flow models with well-studied models for stock price processes and provides a step toward developing realistic yet tractable models for complex limit order driven markets. Public order data from SWX is used as an example to estimate the model parameters.

TOPICS: Factor-based models, exchanges/markets/clearinghouses, equity portfolio management