DeepAI AI Chat
Log In Sign Up

Market Price of Trading Liquidity Risk and Market Depth

12/10/2019
by   Masaaki Kijima, et al.
0

Price impact of a trade is an important element in pre-trade and post-trade analyses. We introduce a framework to analyze the market price of liquidity risk, which allows us to derive an inhomogeneous Bernoulli ordinary differential equation. We obtain two closed form solutions, one of which reproduces the linear function of the order flow in Kyle (1985) for informed traders. However, when traders are not as asymmetrically informed, an S-shape function of the order flow is obtained. We perform an empirical intra-day analysis on Nikkei futures to quantify the price impact of order flow and compare our results with industry's heuristic price impact functions. Our model of order flow yields a rich framework for not only to estimate the liquidity risk parameters, but also to provide a plausible cause of why volatility and correlation are stochastic in nature. Finally, we find that the market depth encapsulates the market price of liquidity risk.

READ FULL TEXT

page 1

page 2

page 3

page 4

04/17/2020

Empirical Study of Market Impact Conditional on Order-Flow Imbalance

In this research we have empirically investigated the key drivers affect...
03/23/2022

Favorit: farmers volatility risk treatment

This paper seeks to develop a strategy based on analytics, for an indivi...
02/13/2018

Asset Price Volatility and Price Extrema

The relationship between price volatilty and a market extremum is examin...
09/28/2021

Intra-Day Price Simulation with Generative Adversarial Modelling of the Order Flow

Intra-day price variations in financial markets are driven by the sequen...
12/01/2022

Economics of NFTs: The Value of Creator Royalties

Non-Fungible Tokens (NFTs) promise to revolutionize how content creators...
05/18/2021

Liquidity Stress Testing in Asset Management – Part 2. Modeling the Asset Liquidity Risk

This article is part of a comprehensive research project on liquidity ri...