Analyzing order flows in limit order books with ratios of Cox-type intensities

TL;DR

This paper introduces a Cox-type model for analyzing order flow ratios in limit order books, enabling effective estimation and interpretation of trading dynamics from high-frequency financial data.

Contribution

It proposes a novel Cox-type model with shared baseline intensity for limit order book flows, along with estimation methods, theoretical properties, and practical applications.

Findings

Model fits high-frequency data well

Identifies key factors influencing order flow

Enables out-of-sample prediction of trading signals

Abstract

We introduce a Cox-type model for relative intensities of orders flows in a limit order book. The model assumes that all intensities share a common baseline intensity, which may for example represent the global market activity. Parameters can be estimated by quasi likelihood maximization, without any interference from the baseline intensity. Consistency and asymptotic behavior of the estimators are given in several frameworks, and model selection is discussed with information criteria and penalization. The model is well-suited for high-frequency financial data: fitted models using easily interpretable covariates show an excellent agreement with empirical data. Extensive investigation on tick data consequently helps identifying trading signals and important factors determining the limit order book dynamics. We also illustrate the potential use of the framework for out-of-sample predictions.