How does latent liquidity get revealed in the limit order book?
Authored by Lorenzo Dall'Amico, Antoine Fosset, Jean-Philippe Bouchaud, Michael Benzaquen
Date Published: 2019
DOI: 10.1088/1742-5468/aaf1oe
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Abstract
Latent order book models have allowed for significant progress in our
understanding of price formation in financial markets. In particular
they are able to reproduce a number of stylized facts, such as the
square-root impact law. An important question that is raised-if one is
to bring such models closer to real market data-is that of the
connection between the latent (unobservable) order book and the real
(observable) order book. Here we suggest a simple, consistent mechanism
for the revelation of latent liquidity that allows for quantitative
estimation of the latent order book from real market data. We
successfully confront our results to real order book data for over a
hundred assets and discuss market stability. One of our key theoretical
results is the existence of a market instability threshold, where the
conversion of latent order becomes too slow, inducing liquidity crises.
Finally we compute the price impact of a metaorder in different
parameter regimes.
Tags
Agent-based models
market microstructure
Market impact
Models of
financial markets
Quantitative finance