This paper proposes a double Markov model of the double continuous auction for describing intra-day price changes. The model splits intra-day price changes as the repetition of one tick price moves and assumes order arrivals are independent Poisson random processes. The dynamic process of price formation is described by a birth-death process of the double M/M/1 server queue corresponding to the best bid/ask. The initial depths of the best bid and ask are defined as different constants depending on the last price change. Thus, the price changes in the model follow a first-order Markov process. As the initial depth of the best bid/ask is originally larger than that of the opposite side when the last price is down/up, the model may explain the negative autocorrelations of the price of the best bid/ask. The estimated parameters are based on the real tick-by-tick data of the Nikkei 225 futures listed in Osaka Stock Exchanges. The authors find the model accurately predicts the returns of Osaka Stock Exchange average.
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This research was supported by the National Natural Science Foundation of China under Grant Nos. 71173060, 71031003, and the Fundamental Research Funds for the Central Universities under Grant No. HIT.HSS.201120, and the last author is partially supported by JSPS KAKENHI under Grant No. 22560059.
This paper was recommended for publication by Editor WANG Shouyang.
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Li, M., Hui, X., Endo, M. et al. A quantitative model for intraday stock price changes based on order flows. J Syst Sci Complex 27, 208–224 (2014). https://doi.org/10.1007/s11424-014-3300-9
- Intra-day price changes
- market microstructure
- order flow
- queuing theory