Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/43198
Authors: 
Härdle, Wolfgang Karl
Hautsch, Nikolaus
Mihoci, Andrija
Year of Publication: 
2009
Series/Report no.: 
CFS Working Paper 2009/18
Abstract: 
We model the dynamics of ask and bid curves in a limit order book market using a dynamic semiparametric factor model. The shape of the curves is captured by a factor structure which is estimated nonparametrically. Corresponding factor loadings are assumed to follow multivariate dynamics and are modelled using a vector autoregressive model. Applying the framework to four stocks traded at the Australian Stock Exchange (ASX) in 2002, we show that the suggested model captures the spatial and temporal dependencies of the limit order book. Relating the shape of the curves to variables reflecting the current state of the market, we show that the recent liquidity demand has the strongest impact. In an extensive forecasting analysis we show that the model is successful in forecasting the liquidity supply over various time horizons during a trading day. Moreover, it is shown that the model's forecasting power can be used to improve optimal order execution strategies.
Subjects: 
Limit Order Book
Liquidity Risk
Semiparametric Model
Factor Structure
Prediction
JEL: 
C14
C32
C53
G11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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