From orders to prices: A stochastic description of the limit order book to forecast intraday returns

@article{Bleher2020FromOT,
  title={From orders to prices: A stochastic description of the limit order book to forecast intraday returns},
  author={Johannes Bleher and Michael Bleher and Thomas Dimpfl},
  journal={Capital Markets: Market Microstructure eJournal},
  year={2020}
}
We propose a microscopic model to describe the dynamics of the fundamental events in the limit order book (LOB): order arrivals and cancellations. It is based on an operator algebra for individual orders and describes their effect on the LOB. The model inputs are arrival and cancellation rate distributions that emerge from individual behavior of traders, and we show how prices and liquidity arise from the LOB dynamics. In a simulation study we illustrate how the model works and highlight its…