No abstract

We propose a dynamical theory of market liquidity that predicts that the average supply/demand profile is V-shaped and vanishes around the current price. This result is generic, and only relies on mild assumptions about the order flow and on the fact that prices are, to a first approximation, diffusive. This naturally accounts for two striking stylized facts: first, large metaorders have to be fragmented in order to be digested by the liquidity funnel, leading to long-memory in the sign of the order flow. Second, the anomalously small local liquidity induces a breakdown of linear response and a diverging impact of small orders, explaining the "square-root" impact law, for which we provide additional empirical support. Finally, we test our arguments quantitatively using a numerical model of order flow based on the same minimal ingredients.

The phase transitions to absorbing states of the branching-annihilating reaction-diffusion processes mA → (m + k)A, nA → (n − l)A are studied systematically in one space dimension within a new family of models. Four universality classes of non-trivial critical behavior are found. This provides, in particular, the first evidence of universal scaling laws for pair and triplet processes.