In this paper we propose an overview of the recent academic literature devoted to the applications of Hawkes processes in finance. Hawkes processes constitute a particular class of multivariate point processes that has become very popular in empirical high frequency finance this last decade. After a reminder of the main definitions and properties that characterize Hawkes processes, we review their main empirical applications to address many different problems in high frequency finance. Because of their great flexibility and versatility, we show that they have been successfully involved in issues as diverse as estimating the volatility at the level of transaction data, estimating the market stability, accounting for systemic risk contagion, devising optimal execution strategies or capturing the dynamics of the full order book.
We propose a minimal theory of non-linear price impact based on the fact that the (latent) order book is locally linear, as suggested by diffusion-reaction models and general arguments. Our framework allows one to compute the average price trajectory in the presence of a meta-order, that consistently generalizes previously proposed propagator models. We account for the universally observed square-root impact law, and predict non-trivial trajectories when trading is interrupted or reversed. We prove that our framework is free of price manipulation, and that prices can be made diffusive (albeit with a generic short-term mean-reverting contribution). Our model suggests that prices can be decomposed into a transient "mechanical" impact component and a permanent "informational" component.
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