A Novel Approach to Queue-Reactive Models: The Importance of Order Sizes

TL;DR

This paper extends queue-reactive models by incorporating order sizes and book state, significantly improving market simulation accuracy and aligning with real market stylized facts and volatility patterns.

Contribution

The paper introduces an extension to queue-reactive models that accounts for order sizes and current book state, enhancing simulation realism.

Findings

Improved description of order flow properties.

Simulated market volatility matches historical data.

Enhanced queue distribution modeling.

Abstract

In this article, we delve into the applications and extensions of the queue-reactive model for the simulation of limit order books. Our approach emphasizes the importance of order sizes, in conjunction with their type and arrival rate, by integrating the current state of the order book to determine, not only the intensity of order arrivals and their type, but also their sizes. These extensions generate simulated markets that are in line with numerous stylized facts of the market. Our empirical calibration, using futures on German bonds, reveals that the extended queue-reactive model significantly improves the description of order flow properties and the shape of queue distributions. Moreover, our findings demonstrate that the extended model produces simulated markets with a volatility comparable to historical real data, utilizing only endogenous information from the limit order book. This research underscores the potential of the queue-reactive model and its extensions in accurately simulating market dynamics and providing valuable insights into the complex nature of limit order book modeling.