Modeling the limit order book: analytic results and Monte Carlo simulations

Author

Hugh Luckock and Max Skipper

Status

Research Report 2001-7
Date: 4 September, 2001

Abstract

We describe a model of a simple limit order market. Given the underlying supply and demand functions, an analysis of the model yields the stationary probability distributions for the best ask and bid prices in the order book, and for the transaction prices. It also predicts the existence of a clearly-defined price window within which all trades take place. These predictions are confirmed by Monte Carlo simulations.

Key phrases

market microstructure. limit order market. continuous double auction.

AMS Subject Classification (1991)

Primary: 91B26
Secondary:

Content

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Sydney Mathematics and Statistics