Modeling bid and ask price dynamics with an extended Hawkes process and its empirical applications for high-frequency stock market data

TL;DR

This paper introduces an extended Hawkes process model for bid-ask price dynamics, capturing complex market behaviors and applying it to high-frequency US stock data to reveal insights into market microstructure and participant behavior.

Contribution

The paper develops a novel extended Hawkes process model that accounts for spread-dependent and negative excitations, and demonstrates its empirical effectiveness on high-frequency stock data.

Findings

Spread-narrowing tendency observed

Excitations caused by previous events confirmed

Impact of flash crashes analyzed

Abstract

This study proposes a versatile model for the dynamics of the best bid and ask prices using an extended Hawkes process. The model incorporates the zero intensities of the spread-narrowing processes at the minimum bid-ask spread, spread-dependent intensities, possible negative excitement, and nonnegative intensities. We apply the model to high-frequency best bid and ask price data from US stock markets. The empirical findings demonstrate a spread-narrowing tendency, excitations of the intensities caused by previous events, the impact of flash crashes, characteristic trends in fast trading over time, and the different features of market participants in the various exchanges.