Abstract A stochastic model for orderbook dynamics is proposed in Cont et al.(2010) and empirically evaluated in thisthesis. Arrival rates of limit, marketand cancellation orders are described interms of a Markov chain where thearrival rates are exponentiallydistributed. The model not onlyconsiders the best bid and ask queuesbut also additional price levels of theorder book. Methods for computingseveral quantities important to highfrequency trading are proposed usingLaplace transforms and continuedfractions. These quantities includeconditional probabilities such as theprobability of a price increasedepending on the profile of the orderbook. Computing these probabilities aresupposed to be easy enough to computeanalytically. However this was not thecase. We failed in the inversion of theLaplace transform methods and the mainreason is that the instructions in Contet al. (2010) are not adequate when itcomes to perform the inversion. Hence wedraw the conclusion that the method isno good for predicting short termbehavior of limit order books. For longterm applications the model can be usedto simulate the order book with goodresults.

Submitted by Gustavo de Faro Colen Nunes (gustavocolennunes@gmail.com) on 2013-02-28T19:45:35Z No. of bitstreams: 1 MODELO DA DINÂMICA DE UM LIVRO DE ORDENS PARA APLICAÇÕES EM HIGH-FREQUENCY TRADING.pdf: 1769569 bytes, checksum: fcb41165f230caf02656cf7b8a709951 (MD5) / Approved for entry into archive by Suzinei Teles Garcia Garcia (suzinei.garcia@fgv.br) on 2013-02-28T21:30:40Z (GMT) No. of bitstreams: 1 MODELO DA DINÂMICA DE UM LIVRO DE ORDENS PARA APLICAÇÕES EM HIGH-FREQUENCY TRADING.pdf: 1769569 bytes, checksum: fcb41165f230caf02656cf7b8a709951 (MD5) / Made available in DSpace on 2013-03-01T11:06:28Z (GMT). No. of bitstreams: 1 MODELO DA DINÂMICA DE UM LIVRO DE ORDENS PARA APLICAÇÕES EM HIGH-FREQUENCY TRADING.pdf: 1769569 bytes, checksum: fcb41165f230caf02656cf7b8a709951 (MD5) Previous issue date: 2013-02-01 / As operações de alta frequência (High-Frequency Trading - HFT) estão crescendo cada vez mais na BOVESPA (Bolsa de Valores de São Paulo), porém seu volume ainda se encontra muito atrás do volume de operações similares realizadas em outras bolsas de relevância internacional. Este trabalho pretende criar oportunidades para futuras aplicações e pesquisas nesta área. Visando aplicações práticas, este trabalho foca na aplicação de um modelo que rege a dinâmica do livro de ordens a dados do mercado brasileiro. Tal modelo é construído com base em informações do próprio livro de ordens, apenas. Depois de construído o modelo, o mesmo é utilizado em uma simulação de uma estratégia de arbitragem estatística de alta frequência. A base de dados utilizada para a realização deste trabalho é constituída pelas ordens lançadas na BOVESPA para a ação PETR4. / High-frequency trading (HFT) are increasingly growing on BOVESPA (São Paulo Stock Exchange), but their volume is still far behind the volume of similar operations performed on other internationally relevant exchange markets. The main objective of this work is to create opportunities for future research and applications in this area. Aiming at practical applications, this work focuses on applying a model that governs the dynamics of the order book to the Brazilian market. This model is built based in the information of the order book alone. After building the model, a high frequency statistical arbitrage strategy is simulated to validate the model. The database used for this work consists on the orders posted on the equity PETR4 in BOVESPA.