Estimating the intensity of buy and sell arrivals in a limit order book market

Abstract

In this paper, we model the simultaneous buy and sell trade arrival process in a limit order book market. The buy and sell process is modelled based on a bivariate intensity model. In this context we extend the autoregressive conditional intensity (ACI) model by allowing for time varying covariates. Using limit order book data from the SEATS system of the Australian Stock Exchange (ASX), we include variables that reflect the state of the order book with respect to market depth, tightness, as well as, the cumulated volume in the ask and bid queue. Moreover, changes of the order book induced by limit order arrivals are captured as time varying covariates. We show that the state of the order book as well as the observed trading process has a significant impact on the bivariate buy and sell intensity, and thus, influences traders' decision when to trade and on which side of the market.