Do Stylised Facts of Order Book Markets Need Strategic Behaviour?

27 Pages Posted: 2 Jul 2007  

Daniel Ladley

University of Leicester - School of Business

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: June 12, 2007

Abstract

This paper studies the role of strategy and the order book market mechanism in price dynamics and the order flow behaviour. To this end we analyse a zero-intelligence agent model of a dynamic limit order market. Stylised facts of limit order markets are shown to be influenced and, in some cases, governed by the market mechanism rather than strategic interaction. Positive correlation in order types, for instance, is the result of the market architecture, and price movements may be predicted in the short term from analysing the state of the order book. In contrast the absolute probabilities of order submission highlight the contribution of strategic behaviour.

Keywords: Order book markets, stylised facts, market mechanism, strategic behaviour, price dynamics, order flow behaviour, Limit order book, order behaviour

JEL Classification: G12, G14

Suggested Citation

Ladley, Daniel and Schenk-Hoppé, Klaus Reiner, Do Stylised Facts of Order Book Markets Need Strategic Behaviour? (June 12, 2007). Swiss Finance Institute Research Paper No. 07-20. Available at SSRN: https://ssrn.com/abstract=997335 or http://dx.doi.org/10.2139/ssrn.997335

Daniel Ladley

University of Leicester - School of Business ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Klaus Reiner Schenk-Hoppé (Contact Author)

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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