Stochastic simulation framework for the limit order book using liquidity-motivated agents

Efstathios Panayi, Gareth W. Peters

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper, we develop a new form of simulation model for limit order books based on heterogeneous trading agents, whose motivations are liquidity driven. These agents are abstractions of real market participants, expressed in a stochastic model framework. We develop an efficient way to perform statistical calibration of the model parameters on Level 2 limit order book data from Chi-X, based on a combination of indirect inference and multi-objective optimization. We then demonstrate how such a modeling framework can be of use in testing exchange regulations, as well as informing brokerage decisions and other trading based scenarios.
Original languageEnglish
Article number1550013
JournalInternational Journal of Financial Engineering
Volume2
Issue number2
DOIs
Publication statusPublished - 1 Jul 2015

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