Correlation emergence in two coupled limit order books in the fluid limit

Weuse random walks to simulate the fluid limit of two coupled diffusive limit order books to model correlation emergence. The model implements the arrival, cancellation and diffusion of orders coupled by a pairs trader profiting from the mean-reversion between the two order-books in the fluid limit for a Lit order book with vanishing boundary conditions and order volume conservation we are able to demonstrate the recovery of an Epps effect. We show how various stylised facts depend on the model parameters and the numerical scheme and discuss various strengths and weaknesses of the approach. We demonstrate how the Epps effect depends on different choices of time and price discretisation and show how an Epps effect can emerge without recourse to market microstructure effects.

Grantor dc:publisher.institution

Department of Statistical Sciences

Year dc:date.issued

2024

Author dc:creator

• Bauer, Dominic

Advisor dc:contributor.advisor

• Gebbie, Timothy

• online learning
• technical analysis
• portfolio selection
• backtesting
• overf itting
• in-sample
• out-of-sample
• Johannesburg Stock Exchange

Handle dc:identifier.uri

http://hdl.handle.net/11427/40753

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/40753