A Multifactor Regime-Switching Model for Inter-Trade Durations in the Limit Order Market

Elsevier, Forthcoming

42 Pages Posted: 17 Dec 2019

See all articles by Zhicheng Li

Zhicheng Li

Hunan University - Center for Economics, Finance and Management Studies

Haipeng Xing

State University of New York - Stony Brook

Xinyun Chen

The Chinese University of Hong Kong, Shenzhen

Date Written: November 28, 2019

Abstract

This paper studies inter-trade durations in the NASDAQ limit order market and finds that inter-trade durations in ultra-high frequency have two modes. One mode is to the order of approximately 10^{-4} seconds, and the other is to the order of 10^0 seconds. This phenomenon and other empirical evidence suggest that there are two regimes associated with the dynamics of inter-trade durations, and the regime switchings are driven by the changes of high-frequency traders (HFTs) between providing and taking liquidity. To find how the two modes depend on information in the limit order book (LOB), we propose a two-state multi-factor regime-switching (MF-RSD) model for inter-trade durations, in which the probabilities transition matrices are time-varying and depend on some lagged LOB factors. The MF-RSD model has good in-sample fitness and the superior out-of-sample performance, compared with some benchmark duration models. Our findings of the effects of LOB factors on the inter-trade durations help to understand more about the high-frequency market micro-structure.

Keywords: high-frequency trading, inter-trade duration, regime-switching model

JEL Classification: G11, G19, C41, C58

Suggested Citation

Li, Zhicheng and Xing, Haipeng and Chen, Xinyun, A Multifactor Regime-Switching Model for Inter-Trade Durations in the Limit Order Market (November 28, 2019). Elsevier, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3495926 or http://dx.doi.org/10.2139/ssrn.3495926

Zhicheng Li (Contact Author)

Hunan University - Center for Economics, Finance and Management Studies ( email )

2 Lushan South Rd
Changsha, Hunan 410082
China

Haipeng Xing

State University of New York - Stony Brook ( email )

Health Science Center
Stony Brook, NY 11794
United States

Xinyun Chen

The Chinese University of Hong Kong, Shenzhen ( email )

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