Hydrodynamic limit of order book dynamics
Trading and Market Microstructure
2016-02-25 v2
Abstract
In this paper, we establish a fluid limit for a two--sided Markov order book model. Our 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 our fluid approximation on data. The empirical results suggest that the approximation is reasonably good for liquidly--traded stocks in certain time periods.
Keywords
Cite
@article{arxiv.1411.7502,
title = {Hydrodynamic limit of order book dynamics},
author = {Xuefeng Gao and S. J. Deng},
journal= {arXiv preprint arXiv:1411.7502},
year = {2016}
}