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Price Dynamics in a Markovian Limit Order Market

Rama Cont

Imperial College London; CNRS

Adrien De Larrard

Université Paris VII Denis Diderot

February 2012

We propose and study a simple stochastic model for the dynamics of a limit order book, in which arrivals of market order, limit orders and order cancellations are described in terms of a Markovian queueing system. Through its analytical tractability, the model allows to obtain analytical expressions for various quantities of interest such as the distribution of the duration between price changes, the distribution and autocorrelation of price changes, and the probability of an upward move in the price, conditional on the state of the order book. We study the diffusion limit of the price process and express the volatility of price changes in terms of parameters describing the arrival rates of buy and sell orders and cancelations. These analytical results provide some insight into the relation between order flow and price dynamics in order-driven markets.

Number of Pages in PDF File: 23

Keywords: limit order book, market microstructure, queueing, diffusion limit, high-frequency data, liquidity, duration analysis, point process

JEL Classification: G1

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Date posted: January 7, 2011 ; Last revised: March 28, 2012

Suggested Citation

Cont, Rama and de Larrard, Adrien, Price Dynamics in a Markovian Limit Order Market (February 2012). Available at SSRN: http://ssrn.com/abstract=1735338 or http://dx.doi.org/10.2139/ssrn.1735338

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 ( email )
Laboratoire de Probabilites & Modeles aleatoires
Universite Pierre & Marie Curie (Paris VI)
Paris, 75252
HOME PAGE: http://www.proba.jussieu.fr/pageperso/ramacont/
Adrien De Larrard
Université Paris VII Denis Diderot ( email )
2, place Jussieu
Paris, 75005
Feedback to SSRN

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