Cartea, Á;
Jaimungal, S;
(2013)
Modelling Asset Prices for Algorithmic and High-Frequency Trading.
Applied Mathematical Finance
, 20
(6)
512 - 547.
10.1080/1350486X.2013.771515.
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Abstract
Algorithmic trading (AT) and high-frequency (HF) trading, which are responsible for over 70% of US stocks trading volume, have greatly changed the microstructure dynamics of tick-by-tick stock data. In this article, we employ a hidden Markov model to examine how the intraday dynamics of the stock market have changed and how to use this information to develop trading strategies at high frequencies. In particular, we show how to employ our model to submit limit orders to profit from the bid–ask spread, and we also provide evidence of how HF traders may profit from liquidity incentives (liquidity rebates). We use data from February 2001 and February 2008 to show that while in 2001 the intraday states with the shortest average durations (waiting time between trades) were also the ones with very few trades, in 2008 the vast majority of trades took place in the states with the shortest average durations. Moreover, in 2008, the states with the shortest durations have the smallest price impact as measured by the volatility of price innovations.
| Type: | Article |
|---|---|
| Title: | Modelling Asset Prices for Algorithmic and High-Frequency Trading |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1080/1350486X.2013.771515 |
| Publisher version: | http://dx.doi.org/10.1080/1350486X.2013.771515 |
| Language: | English |
| Additional information: | © 2013 The Author(s). Published by Taylor & Francis. This is an Open Access article distributed under the terms of the Creative Commons Attribution License http://creativecommons.org/licenses/by/3.0/, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The moral rights of the named author(s) have been asserted. Permission is granted subject to the terms of the License under which the work was published. Please check the License conditions for the work which you wish to reuse. Full and appropriate attribution must be given. This permission does not cover any third party copyrighted material which may appear in the work requested. |
| UCL classification: | UCL > Provost and Vice Provost Offices UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences |
| URI: | https://discovery.ucl.ac.uk/id/eprint/1467031 |
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