Simulation of a Limit Order Driven Market
Posted: 20 May 2019
Date Written: June 3, 2008
We present an order flow model framework for limit order driven markets. Different from previous models we explicitly model a reference price process that “sweeps” the limit order book as it fluctuates up and down. Our framework allows us to use any stochastic process to model this reference price and very general specifications of the limit order flow. We believe that this framework can fruitfully combine order flow models with well-studied models for stock price processes and provides a step towards developing realistic, yet tractable models for complex limit order driven markets. We use public order data from SWX as an example to estimate the model parameters.
Keywords: Limit Order Book, Order Flow, Algorithmic Trading, Stock Exchange
JEL Classification: C00, C1, E4, E5, G1, G2
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