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arXiv · 1912.00764

A multifactor regime-switching model for inter-trade durations in the limit order market

Zhicheng Li·Haipeng Xing·Xinyun Chen
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Abstract

This paper studies inter-trade durations in the NASDAQ limit order market and finds that inter-trade durations in ultra-high frequency have two modes. One mode is to the order of approximately 10^{-4} seconds, and the other is to the order of 1 second. This phenomenon and other empirical evidence suggest that there are two regimes associated with the dynamics of inter-trade durations, and the regime switchings are driven by the changes of high-frequency traders (HFTs) between providing and taking liquidity. To find how the two modes depend on information in the limit order book (LOB), we propose a two-state multifactor regime-switching (MF-RSD) model for inter-trade durations, in which the probabilities transition matrices are time-varying and depend on some lagged LOB factors. The MF-RSD model has good in-sample fitness and the superior out-of-sample performance, compared with some benchmark duration models. Our findings of the effects of LOB factors on the inter-trade durations help to understand more about the high-frequency market microstructure.

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Zhicheng Li, Haipeng Xing, Xinyun Chen. 2019-12-02. A multifactor regime-switching model for inter-trade durations in the limit order market. https://arxiv.org/abs/1912.00764

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