"Market making" behaviour in an order book model and its impact on the bid-ask spread

Details "Market making" behaviour in an order book model and its impact on the bid-ask spread "Market making" behaviour in an order book model and its impact on the bid-ask spread

2010-03-19

arxiv.org/abs/1003.3796v2

Economy

Quantitative Finance

Trading and Market Microstructure

17 pages, 9 figures

Scientific paper

It has been suggested that marked point processes might be good candidates for the modelling of financial high-frequency data. A special class of point processes, Hawkes processes, has been the subject of various investigations in the financial community. In this paper, we propose to enhance a basic zero-intelligence order book simulator with arrival times of limit and market orders following mutually (asymmetrically) exciting Hawkes processes. Modelling is based on empirical observations on time intervals between orders that we verify on several markets (equity, bond futures, index futures). We show that this simple feature enables a much more realistic treatment of the bid-ask spread of the simulated order book.

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