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Forecasting prices from level-I quotes in the presence of hidden liquidity

Wed, 30 May 2012 07:37:34 GMT

Bid and ask sizes at the top of the order book provide information on short-term price moves. Drawing from classical descriptions of the order book in terms of queues and order-arrival rates (Smith et al., 2003), we consider a diffusion model for the evolution of the best bid/ask queues. We compute the probability that the next price move is upward, conditional on the best bid/ask sizes, the hidden liquidity in the market and the correlation between changes in the bid/ask sizes. The model can be useful, among other things, to rank trading venues in terms of the “information content” of their quotes and to estimate hidden liquidity in a market based on high-frequency data. We illustrate the approach with an empirical study of a few stocks using quotes from various exchanges.

  • Content Type Journal Article
  • Pages 35-43
  • DOI 10.3233/AF-2011-004
  • Authors
    • Marco Avellaneda,
    • Josh Reed,
    • Sasha Stoikov,

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