TY - RPRT A1 - Härdle, Wolfgang Karl A1 - Hautsch, Nikolaus A1 - Mihoci, Andrija T1 - Modelling and Forecasting Liquidity Supply Using Semiparametric Factor Dynamics N2 - We model the dynamics of ask and bid curves in a limit order book market using a dynamic semiparametric factor model. The shape of the curves is captured by a factor structure which is estimated nonparametrically. Corresponding factor loadings are assumed to follow multivariate dynamics and are modelled using a vector autoregressive model. Applying the framework to four stocks traded at the Australian Stock Exchange (ASX) in 2002, we show that the suggested model captures the spatial and temporal dependencies of the limit order book. Relating the shape of the curves to variables reflecting the current state of the market, we show that the recent liquidity demand has the strongest impact. In an extensive forecasting analysis we show that the model is successful in forecasting the liquidity supply over various time horizons during a trading day. Moreover, it is shown that the model’s forecasting power can be used to improve optimal order execution strategies. KW - Limit Order Book KW - Liquidity Risk KW - Semiparametric Modelling KW - Factor Structure KW - Prediction Y1 - 2009 UR - http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2009-044.pdf PB - SFB 649 CY - Berlin ER - TY - RPRT A1 - Härdle, Wolfgang Karl A1 - Hautsch, Nikolaus A1 - Mihoci, Andrija T1 - Modelling and Forecasting Liquidity Supply Using Semiparametric Factor Dynamics N2 - We model the dynamics of ask and bid curves in a limit order book market using a dynamic semiparametric factor model. The shape of the curves is captured by a factor structure which is estimated nonparametrically. Corresponding factor loadings are assumed to follow multivariate dynamics and are modelled using a vector autoregressive model. Applying the framework to four stocks traded at the Australian Stock Exchange (ASX) in 2002, we show that the suggested model captures the spatial and temporal dependencies of the limit order book. Relating the shape of the curves to variables reflecting the current state of the market, we show that the recent liquidity demand has the strongest impact. In an extensive forecasting analysis we show that the model is successful in forecasting the liquidity supply over various time horizons during a trading day. Moreover, it is shown that the model’s forecasting power can be used to improve optimal order execution strategies. KW - Limit Order Book KW - Liquidity Risk KW - Semiparametric Model KW - Factor Structure KW - Prediction Y1 - 2009 UR - https://www.ifk-cfs.de/fileadmin/downloads/publications/wp/09_18.pdf PB - Center for Financial Studies (CFS) CY - Frankfurt ER - TY - GEN A1 - Härdle, Wolfgang Karl A1 - Hautsch, Nikolaus A1 - Mihoci, Andrija T1 - Modelling and Forecasting Liquidity Supply Using Semiparametric Factor Dynamics T2 - Journal of Empirical Finance N2 - We model the dynamics of ask and bid curves in a limit order book market using a dynamic semiparametric factor model. The shape of the curves is captured by a factor structure which is estimated nonparametrically. Corresponding factor loadings are modelled jointly with best bid and best ask quotes using a vector error correction specification. Applying the framework to four stocks traded at the Australian Stock Exchange (ASX) in 2002, we show that the suggested model captures the spatial and temporal dependencies of the limit order book. We find spill-over effects between both sides of the market and provide evidence for short-term quote predictability. Relating the shape of the curves to variables reflecting the current state of the market, we show that the recent liquidity demand has the strongest impact. In an extensive forecasting analysis we show that the model is successful in forecasting the liquidity supply over various time horizons during a trading day. Moreover, it is shown that the model's forecasting power can be used to improve optimal order execution strategies. KW - Limit Order Book KW - Liquidity Risk KW - Semiparametric Modelling KW - Factor Structure KW - Prediction Y1 - 2012 U6 - https://doi.org/10.1016/j.jempfin.2012.04.002 SN - 0927-5398 VL - 19 IS - 4 SP - 610 EP - 625 ER -