English

A diffusion approximation for limit order book models

Probability 2017-08-25 v3 Trading and Market Microstructure

Abstract

This paper derives a diffusion approximation for a sequence of discrete-time one-sided limit order book models with non-linear state dependent order arrival and cancellation dynamics. The discrete time sequences are specified in terms of an R+\R_+-valued best bid price process and an Lloc2L^2_{loc}-valued volume process. It is shown that under suitable assumptions the sequence of interpolated discrete time models is relatively compact in a localized sense and that any limit point satisfies a certain infinite dimensional SDE. Under additional assumptions on the dependence structure we construct two classes of models, which fit in the general framework, such that the limiting SDE admits a unique solution and thus the discrete dynamics converge to a diffusion limit in a localized sense.

Keywords

Cite

@article{arxiv.1608.01795,
  title  = {A diffusion approximation for limit order book models},
  author = {Ulrich Horst and Dörte Kreher},
  journal= {arXiv preprint arXiv:1608.01795},
  year   = {2017}
}

Comments

Titel changed, appendix added, presentation improved