Liquidity Crisis, Granularity of the Order Book and Price Fluctuations

Details Liquidity Crisis, Granularity of the Order Book and Price Fluctuations Liquidity Crisis, Granularity of the Order Book and Price Fluctuations

2009-02-24

arxiv.org/abs/0902.4159v2

Economy

Quantitative Finance

Trading and Market Microstructure

18 pages, 7 figures

Scientific paper

We introduce a microscopic model for the dynamics of the order book to study how the lack of liquidity influences price fluctuations. We use the average density of the stored orders (granularity $g$) as a proxy for liquidity. This leads to a Price Impact Surface which depends on both volume $\omega$ and $g$. The dependence on the volume (averaged over the granularity) of the Price Impact Surface is found to be a concave power law function $<\phi(\omega,g)>_g\sim\omega^\delta$ with $\delta\approx 0.59$. Instead the dependence on the granularity is $\phi(\omega,g|\omega)\sim g^\alpha$ with $\alpha\approx-1$, showing a divergence of price fluctuations in the limit $g\to 0$. Moreover, even in intermediate situations of finite liquidity, this effect can be very large and it is a natural candidate for understanding the origin of large price fluctuations.

Affiliated with

Also associated with

No associations

Rating

Liquidity Crisis, Granularity of the Order Book and Price Fluctuations does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Liquidity Crisis, Granularity of the Order Book and Price Fluctuations, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Liquidity Crisis, Granularity of the Order Book and Price Fluctuations will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-172478