Signs of Market Orders and Human Dynamics

Abstract

A time series of signs of market orders was found to exhibit long memory. There are several proposed explanations for the origin of this phenomenon. A cogent one is that investors tend to strategically split their large hidden orders into small pieces before execution to prevent the increase in the trading costs. Several mathematical models have been proposed under this explanation.In this paper, taking the bursty nature of the human activity patterns into account, we present a new mathematical model of order signs that have a long memory property. In addition, the power law exponent of distribution of a time interval between order executions is supposed to depend on the size of hidden order. More precisely, we introduce a discrete time stochastic process for polymer model, and show it's scaled process converges to a superposition of a Brownian motion and countably infinite number of fractional Brownian motions with Hurst exponents greater than one-half. IntroductionEmpirical studies [2,6,8,11] on high frequency financial data of stock markets that employ the continuous double auction method have revealed a time series of signs of market orders has long memory property. In contrast, a time series of stock returns is known to have short memory property. A time series of order signs is defined by changing transactions at the best ask price into C1 and transactions at the best bid price into 1. The auto-correlation function of the order signs decays as a power law of the lag and the exponent of the decay is less than 1, which is equivalent to a Hurst exponent of the time series is greater than one-half.In this paper, we propose a new mathematical model which takes account of origin of the long memory in order signs. As a first step, we define a discrete time stochastic process of cumulative order signs in accordance with some explanation

A model of transaction signs with order splitting and public information

“…In the hypothesis of effect of public information, the long memory property of transaction signs is due to delayed response to public information. This kind of hypothesis is found in To ´th et al ( 2015) and used by Murai (2015) and this paper.…”

“…In the hypothesis of order splitting, investors split their unrevealed hidden order of buying or selling into small pieces before execution. It is proposed by Lillo et al (2005) and used by Kuroda et al (2011Kuroda et al ( , (2013 and Murai (2015). One explanation why investors split their hidden order is because of investors' strategical behavior.…”