Modelling the shape of the limit order book Articles uri icon

publication date

  • February 2018

start page

  • 1575

end page

  • 1597

issue

  • 9

volume

  • 18

International Standard Serial Number (ISSN)

  • 1469-7688

Electronic International Standard Serial Number (EISSN)

  • 1469-7696

abstract

  • This article develops a parsimonious way to use the shape of the limit order book to produce an estimate of the asset price. The posited model captures and describes the evolution of the distribution of limit orders on the bid and ask sides of the LOB during the trading session and provides estimates of the execution asset price over time. The performance of the model is evaluated against some existing standards from the market microstructure literature during the trading session. Empirical evidence on listed companies confirm a strong contribution of our methodology to the innovation in asset prices, according to the information share coefficients. We also document a significant improvement relative to the Hasbrouck [J. Finance, 1991, 46, 179-207] model when our model estimates are included as regressors.

keywords

  • limit order book; noise trader; partial differential equation; high-frequency asset pricing; model