Abstract

http://ssrn.com/abstract=1273160
 
 

References (19)



 
 

Citations (17)



 


 



A Stochastic Model for Order Book Dynamics


Rama Cont


Imperial College London; CNRS - Universite de Paris VI

Sasha Stoikov


Cornell Financial Engineering Manhattan

Rishi Talreja


Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

September 24, 2008


Abstract:     
We propose a stochastic model for the continuous-time dynamics of a limit order book. The model strikes a balance between three desirable features: it can be estimated easily from data, it captures key empirical properties of order book dynamics and its analytical tractability allows for fast computation of various quantities of interest without resorting to simulation. We describe a simple parameter estimation procedure based on high-frequency observations of the order book and illustrate the results on data from the Tokyo stock exchange. Using Laplace transform methods, we are able to efficiently compute probabilities of various events, conditional on the state of the order book: an increase in the mid-price, execution of an order at the bid before the ask quote moves, and execution of both a buy and a sell order at the best quotes before the price moves. Using high-frequency data, we show that our model can effectively capture the short-term dynamics of a limit order book. We also evaluate the performance of a simple trading strategy that is based on our results.

Number of Pages in PDF File: 23

Keywords: High frequency data, limit order book, financial engineering, Laplace transform

JEL Classification: C44, C51, C32

working papers series





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Date posted: September 26, 2008 ; Last revised: August 31, 2009

Suggested Citation

Cont, Rama and Stoikov, Sasha and Talreja, Rishi, A Stochastic Model for Order Book Dynamics (September 24, 2008). Available at SSRN: http://ssrn.com/abstract=1273160 or http://dx.doi.org/10.2139/ssrn.1273160

Contact Information

Rama Cont (Contact Author)
Imperial College London ( email )
London, SW7 2AZ
United Kingdom
HOME PAGE: http://www3.imperial.ac.uk/people/r.cont
CNRS - Universite de Paris VI ( email )
Laboratoire de Probabilites & Modeles aleatoires
Universite Pierre & Marie Curie (Paris VI)
Paris, 75252
France
HOME PAGE: http://www.proba.jussieu.fr/pageperso/ramacont/
Sasha Stoikov
Cornell Financial Engineering Manhattan ( email )
55 Broad street (3rd floor)
New York, NY New York 10005
United States
Rishi Talreja
Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )
331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States
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