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; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

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 K. 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 )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, D-10099
Germany
+49 30 2093 5631 (Phone)
+49 30 2093 5649 (Fax)

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

Andrija Mihoci

Brandenburg University of Technology (BTU) ( email )

PO Box 101344
Cottbus, 03013
Germany

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