Stochastic Simulation Framework for the Limit Order Book Using Liquidity Motivated Agents

45 Pages Posted: 19 Jan 2015

See all articles by Efstathios Panayi

Efstathios Panayi

University College London - Financial Computing and Analytics Group, Department of Computer Science

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University; University College London - Department of Statistical Science; University of Oxford - Oxford-Man Institute of Quantitative Finance; London School of Economics & Political Science (LSE) - Systemic Risk Centre; University of New South Wales (UNSW) - Faculty of Science

Date Written: January 18, 2015

Abstract

In this paper we develop a new form of agent-based model for limit order books based on heterogeneous trading agents, whose motivations are liquidity driven. These agents are abstractions of real market participants, expressed in a stochastic model framework. We develop an efficient way to perform statistical calibration of the model parameters on Level 2 limit order book data from Chi-X, based on a combination of indirect inference and multi-objective optimisation. We then demonstrate how such an agent-based modelling framework can be of use in testing exchange regulations, as well as informing brokerage decisions and other trading based scenarios.

Keywords: Limit order book, agent-based model, copula dependence, exchange regulation

JEL Classification: G10, C15, C51, G18

Suggested Citation

Panayi, Efstathios and Peters, Gareth, Stochastic Simulation Framework for the Limit Order Book Using Liquidity Motivated Agents (January 18, 2015). Available at SSRN: https://ssrn.com/abstract=2551410 or http://dx.doi.org/10.2139/ssrn.2551410

Efstathios Panayi (Contact Author)

University College London - Financial Computing and Analytics Group, Department of Computer Science ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University ( email )

Edinburgh Campus
Edinburgh, EH14 4AS
United Kingdom

HOME PAGE: http://garethpeters78.wixsite.com/garethwpeters

University College London - Department of Statistical Science ( email )

1-19 Torrington Place
London, WC1 7HB
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

University of Oxford Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

University of New South Wales (UNSW) - Faculty of Science ( email )

Australia

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