Department of Economics and Business Economics

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

Research output: Working paperResearch

Standard

State-dependent Hawkes processes and their application to limit order book modelling. / Morariu-Patrichi, Maxime; Pakkanen, Mikko S.

Aarhus : Institut for Økonomi, Århus Universitet, 2018.

Research output: Working paperResearch

Harvard

Morariu-Patrichi, M & Pakkanen, MS 2018 'State-dependent Hawkes processes and their application to limit order book modelling' Institut for Økonomi, Århus Universitet, Aarhus.

APA

Morariu-Patrichi, M., & Pakkanen, M. S. (2018). State-dependent Hawkes processes and their application to limit order book modelling. Aarhus: Institut for Økonomi, Århus Universitet. CREATES Research Papers, No. 2018-26

CBE

Morariu-Patrichi M, Pakkanen MS. 2018. State-dependent Hawkes processes and their application to limit order book modelling. Aarhus: Institut for Økonomi, Århus Universitet.

MLA

Morariu-Patrichi, Maxime and Mikko S. Pakkanen State-dependent Hawkes processes and their application to limit order book modelling. Aarhus: Institut for Økonomi, Århus Universitet. (CREATES Research Papers; Journal number 2018-26). 2018., 30 p.

Vancouver

Morariu-Patrichi M, Pakkanen MS. State-dependent Hawkes processes and their application to limit order book modelling. Aarhus: Institut for Økonomi, Århus Universitet. 2018 Sep 26.

Author

Morariu-Patrichi, Maxime ; Pakkanen, Mikko S./ State-dependent Hawkes processes and their application to limit order book modelling. Aarhus : Institut for Økonomi, Århus Universitet, 2018. (CREATES Research Papers; No. 2018-26).

Bibtex

@techreport{48a586c0438a4666aa6061d5d280eb80,
title = "State-dependent Hawkes processes and their application to limit order book modelling",
abstract = "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",
keywords = "Hawkes process, high-frequency financial data, market microstructure, limit order book, maximum likelihood estimation, endogeneity",
author = "Maxime Morariu-Patrichi and Pakkanen, {Mikko S.}",
year = "2018",
month = "9",
day = "26",
language = "English",
publisher = "Institut for {\O}konomi, {\AA}rhus Universitet",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, {\AA}rhus Universitet",

}

RIS

TY - UNPB

T1 - State-dependent Hawkes processes and their application to limit order book modelling

AU - Morariu-Patrichi,Maxime

AU - Pakkanen,Mikko S.

PY - 2018/9/26

Y1 - 2018/9/26

N2 - 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

AB - 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

KW - Hawkes process, high-frequency financial data, market microstructure, limit order book, maximum likelihood estimation, endogeneity

M3 - Working paper

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

PB - Institut for Økonomi, Århus Universitet

CY - Aarhus

ER -