Disentangling and quantifying market participant volatility contributions

TL;DR

This paper uses Hawkes processes to analyze and quantify how different market participants contribute to volatility in the Cac40 index futures, revealing that high-frequency traders are more internally driven than other agents.

Contribution

It introduces a method to disentangle and quantify individual market participant contributions to volatility using Hawkes process branching structures.

Findings

Fast intermediaries have a smaller volatility footprint than slower agents.

High-frequency traders are more endogenously driven than other agents.

The approach leverages labeled order data for detailed analysis.

Abstract

Thanks to the access to labeled orders on the Cac40 index future provided by Euronext, we are able to quantify market participants contributions to the volatility in the diffusive limit. To achieve this result we leverage the branching properties of Hawkes point processes. We find that fast intermediaries (e.g., market maker type agents) have a smaller footprint on the volatility than slower, directional agents. The branching structure of Hawkes processes allows us to examine also the degree of endogeneity of each agent behavior. We find that high-frequency traders are more endogenously driven than other types of agents.