Department of Economics and Business Economics

State-dependent Hawkes processes and their application to limit order book modelling

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  • rp18_26

    Final published version, 3.55 MB, PDF document

  • Maxime Morariu-Patrichi, Imperial College London, United Kingdom
  • Mikko S. Pakkanen, Imperial College London and Creates, United Kingdom
We study statistical aspects of state-dependent Hawkes processes, which are an extension of Hawkes processes where a self- and cross-exciting counting process and a state process are fully coupled, interacting with each other. The excitation kernel of the counting process depends on the state process that, reciprocally, switches state when there is an event in the counting process. We first establish the existence and uniqueness of state-dependent Hawkes processes and explain how they can be simulated. Then we develop maximum likelihood estimation methodology for parametric specifications of the process. We apply state-dependent Hawkes processes to high-frequency limit order book data, allowing us to build a novel model that captures the feedback loop between the order flow and the shape of the limit order book. We estimate two specifications of the model, using the bid-ask spread and the queue imbalance as state variables, and find that excitation effects in the order flow are strongly state-dependent. Additionally, we find that the endogeneity of the order flow, measured by the magnitude of excitation, is also state-dependent, being more pronounced in disequilibrium states of the limit order book
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Århus Universitet
Number of pages30
Publication statusPublished - 26 Sep 2018
SeriesCREATES Research Papers

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