Modelling and forecasting liquidity supply using semiparametric factor dynamics

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. Corres
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. JEL-Classifications: C14, C32, C53, G11 Keywords: Limit Order Book, Liquidity Risk, Semiparametric Model, Factor Structure, Prediction
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Metadaten
Author:Wolfgang Karl Härdle, Nikolaus Hautsch, Andrija Mihoci
URN:urn:nbn:de:hebis:30-70742
Series (Serial Number):CFS working paper series (2009, 18)
Document Type:Working Paper
Language:English
Date of Publication (online):2009/09/20
Year of first Publication:2009
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2009/09/20
Tag:Factor Structure ; Limit Order Book ; Liquidity Risk ; Prediction; Semiparametric Model
HeBIS PPN:218888732
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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