Modelling and Forecasting Liquidity Supply Using Semiparametric Factor Dynamics

35 Pages Posted: 20 Sep 2009 Last revised: 6 Jun 2016

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin; Charles University; National Yang Ming Chiao Tung University; Asian Competitiveness Institute

Andrija Mihoci

Brandenburg University of Technology (BTU)

Date Written: September 18, 2009

Abstract

We model the dynamics of ask and bid curves in a limit order book market using a dynamic semiparametric factor model. The shape of the curves is captured by a factor structure which is estimated nonparametrically. Corresponding factor loadings are assumed to follow multivariate dynamics and are modelled using a vector autoregressive model. Applying the framework to four stocks traded at the Australian Stock Exchange (ASX) in 2002, we show that the suggested model captures the spatial and temporal dependencies of the limit order book. Relating the shape of the curves to variables reflecting the current state of the market, we show that the recent liquidity demand has the strongest impact. In an extensive forecasting analysis we show that the model is successful in forecasting the liquidity supply over various time horizons during a trading day. Moreover, it is shown that the model’s forecasting power can be used to improve optimal order execution strategies.

Keywords: Limit Order Book, Liquidity Risk, Semiparametric Model, Factor Structure, Prediction

JEL Classification: C14, C32, C53, G11

Suggested Citation

Hautsch, Nikolaus and Härdle, Wolfgang Karl and Mihoci, Andrija, Modelling and Forecasting Liquidity Supply Using Semiparametric Factor Dynamics (September 18, 2009). CFS Working Paper, No. 2009/18, Available at SSRN: https://ssrn.com/abstract=1475168 or http://dx.doi.org/10.2139/ssrn.1475168

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Kolingasse 14
Vienna, A-1090
Austria

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

National Yang Ming Chiao Tung University ( email )

No. 1001, Daxue Rd. East Dist.
Hsinchu City 300093
Taiwan

Asian Competitiveness Institute ( email )

Singapore

Andrija Mihoci

Brandenburg University of Technology (BTU) ( email )

PO Box 101344
Cottbus, 03013
Germany

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