Abstract

A limit order book provides information on available limit order prices and their volumes. Based on these quantities, we give an empirical result on the relationship between the bid-ask liquidity balance and trade sign and we show that liquidity balance on best bid/best ask is quite informative for predicting the future market order's direction. Moreover, we de ne price jump as a sell (buy) market order arrival which is executed at a price which is smaller (larger) than the best bid (best ask) price at the moment just after the precedent market order arrival. Features are then extracted related to limit order volumes, limit order price gaps, market order information and limit order event information. Logistic regression is applied to predict the price jump from the limit order book's feature. LASSO logistic regression is introduced to help us make variable selection from which we are capable to highlight the importance of di erent features in predicting the future price jump. In order to get rid of the intraday data seasonality, the analysis is based on two separated datasets: morning dataset and afternoon dataset. Based on an analysis on forty largest French stocks of CAC40, we nd that trade sign and market order size as well as the liquidity on the best bid (best ask) are consistently informative for predicting the incoming price jump.

Highlights

  • The determination of jumps in financial time series already has a long history as a challenging, theoretically interesting and practically important problem

  • We provide an empirical result on the relationship between bid-ask limit order liquidity balance and trade sign and an analysis on the prediction of the inter-trade price jump occurrence by logistic regression

  • We show that limit order liquidity balance on best bid/ best ask is informative to predict the market order’s direction

Read more

Summary

Introduction

The determination of jumps in financial time series already has a long history as a challenging, theoretically interesting and practically important problem. Be it from the point of view of the statistician trying to separate, in spot prices, those moves corresponding to “jumps” from those who are compatible with the hypothesis of a process with continuous paths, or from the point of view of the practitioner: market maker, algorithmic trader, arbitrageur, who is in dire need of knowing the direction and the amplitude of the price change, there is a vast, still unsatisfied interest for this question.

Objectives
Results
Conclusion
Full Text
Published version (Free)

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call