Abstract

http://ssrn.com/abstract=1691401
 
 

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Forecasting Prices from Level-I Quotes in the Presence of Hidden Liquidity


Marco Avellaneda


New York University (NYU) - Courant Institute of Mathematical Sciences; Finance Concepts LLC

Josh Reed


New York University (NYU) - Department of Information, Operations, and Management Sciences

Sasha Stoikov


Cornell Financial Engineering Manhattan

June 29, 2011

Algorithmic Finance, Vol. 1, No. 1, 2011

Abstract:     
Bid and ask sizes at the top of the order book provide information on short-term price moves. Drawing from classical descriptions of the order book in terms of queues and order-arrival rates (Smith et al (2003)), we consider a diffusion model for the evolution of the best bid/ask queues. We compute the probability that the next price move is upward, conditional on the best bid/ask sizes, the hidden liquidity of the market and the correlation between changes in the bid/ask sizes. The model can be useful, among other things, to rank trading venues in terms of the "information content" of their quotes and to estimate the hidden liquidity in a market based on high-frequency data. We illustrate the approach with an empirical study of a few liquid stocks using quotes from various exchanges.

Number of Pages in PDF File: 10

Keywords: High frequency data, order book modeling, financial engineering, diffusion limit, hidden liquidity, market microstructure

JEL Classification: C44, C51, C32

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Date posted: October 14, 2010 ; Last revised: October 11, 2012

Suggested Citation

Avellaneda, Marco and Reed, Josh and Stoikov, Sasha, Forecasting Prices from Level-I Quotes in the Presence of Hidden Liquidity (June 29, 2011). Algorithmic Finance, Vol. 1, No. 1, 2011. Available at SSRN: http://ssrn.com/abstract=1691401

Contact Information

Marco Avellaneda
New York University (NYU) - Courant Institute of Mathematical Sciences ( email )
251 Mercer Street
New York, NY 10012
United States
212-998-3129 (Phone)
212-995-4121 (Fax)
Finance Concepts LLC ( email )
590 Madison Avenue
21st Floor
New York, NY 10022
United States
HOME PAGE: http://www.finance-concepts.com
Josh Reed
New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )
44 West Fourth Street
New York, NY 10012
United States
Sasha Stoikov (Contact Author)
Cornell Financial Engineering Manhattan ( email )
55 Broad street (3rd floor)
New York, NY New York 10005
United States
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