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Market Microstructure and Modeling of the Trading Flow

Abstract : We offer an original way to analyse at the various high frequency streams of information originating from financial markets and to provide simple intuitive models that closely mirror reality. We observe empirical data and report some of its stylized facts and propose models to capture these facts. In chapter 1, we review the basic definitions and properties of electronic exchanges. In particular, we review the background work done in microstructure and trade modeling, show how they relate to our work and introduce the tick size, used to classify our assets and interpret the various results. In chapter 2, we bring qualitative empirical evidence that the impact of a single trade depends on the intertrade time lags. We find that when the trading rate becomes faster, the return variance per trade strongly increases and that this behavior persists at coarser time scales. We also show that the spread value is an increasing function of the activity and deduce that orderbooks are more likely empty when the trading rate is high. In chapter 3, we present a model to capture microstructure noise. Asset prices are represented as the sum of tick returns arriving at random Poisson times. The model consists of an underlying diffusive martingale which is contaminated by some vanishing autocorrelated noise. We are able to capture the signature form of the sampled realized variance and the weak but significant autocorrelation of tick returns. In chapter 4, we use Hawkes point processes to model the random arrival of trades in the market. We model fine to coarse behavior of prices and how it affects the moments of price returns. We propose a simple non parametric estimation technique of the dependence structure of Hawkes processes in the one dimensional case and very particular multidimensional cases. We apply the method to Futures assets and find decay kernels having a power law form.
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Contributor : Khalil Antoine Dayri <>
Submitted on : Thursday, April 19, 2012 - 12:42:31 PM
Last modification on : Wednesday, March 27, 2019 - 4:08:31 PM
Long-term archiving on: : Friday, July 20, 2012 - 2:35:08 AM



  • HAL Id : pastel-00689127, version 1



Khalil Antoine Dayri. Market Microstructure and Modeling of the Trading Flow. Trading and Market Microstructure [q-fin.TR]. Ecole Polytechnique X, 2012. English. ⟨pastel-00689127⟩



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