HYDRODYNAMIC LIMIT OF ORDER-BOOK DYNAMICS
- 28 November 2016
- journal article
- research article
- Published by Cambridge University Press (CUP) in Probability in the Engineering and Informational Sciences
- Vol. 32 (1) , 96-125
Abstract
In this paper, we establish a fluid limit for a two-sided Markov order book model. The main result states that in a certain asymptotic regime, a pair of measure-valued processes representing the “sell-side shape” and “buy-side shape” of an order book converges to a pair of deterministic measure-valued processes in a certain sense. We also test the fluid approximation on data. The empirical results suggest that the approximation is reasonably good for liquidly traded stocks in certain time periods.Keywords
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