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Price dynamics in limit order markets: a multi-scale stochastic model and its hydrodynamic limit

Date: 
Wednesday 8th October 2014 - 11:45 to 12:15
Venue: 
INI Seminar Room 1
Session Title: 
Mini Workshop on Kinetic Models and Mean Field Games in Finance
Abstract: 
The advent of high frequency trading has changed the landscape of financial markets, leading to a heterogeneous environment where market participants with a wide range of trading frequencies interact through the limit order book. We propose a stochastic model for dynamics of price and order flow in a limit order market, which captures the coexistence of high frequency and low frequency order flow and examines the consequences of this heterogeneity on price dynamics, volatility and liquidity. We derive scaling limits of the model under different assumptions on the order flow : one variant yields as hydrodynamic limit the Lasry-Lions (2007) price formation model, providing a micro-structural foundation for this model, while another set of assumptions leads to a two-phase moving boundary problem.
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University of Cambridge Research Councils UK
    Clay Mathematics Institute London Mathematical Society NM Rothschild and Sons