The Conduits of Price Discovery: A Machine Learning Approach

48 Pages Posted: 14 Oct 2020 Last revised: 4 Mar 2021

See all articles by Amy Kwan

Amy Kwan

University of Sydney Business School

Richard Philip

University of Sydney Business School

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Date Written: October 13, 2020

Abstract

When examining information flow into prices, empirical literature usually focusses on direct conduits such as order submissions. Meanwhile, theory suggests that market conditions should have substantial additional effects. Empirical analyses of such effects are methodologically challenging and therefore uncommon. We bypass these challenges using a machine learning technique that allows for multiple conditioning variables. Consistent with theory, price discovery is notably affected by such conditions as the state of the limit order book, price history, bid-ask spread, and order arrival frequency. The state of the book and price history stand out as conduits, whose magnitudes rival that of order submissions.

Keywords: price discovery, order submission strategies, machine learning

JEL Classification: G14, G15

Suggested Citation

Kwan, Amy and Philip, Richard and Shkilko, Andriy, The Conduits of Price Discovery: A Machine Learning Approach (October 13, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3710491 or http://dx.doi.org/10.2139/ssrn.3710491

Amy Kwan

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Richard Philip

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Andriy Shkilko (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
141
Abstract Views
653
rank
254,513
PlumX Metrics