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Statistical Modelling of Price Difference Durations Between Limit Order Books: Applications in Smart Order Routing
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2023 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Statistisk modellering av varaktigheten av prisskillnader mellan orderböcker: Tillämpningar inom smart order routing (Swedish)
Abstract [en]

The modern electronic financial market is composed of a large amount of actors. With the surge in algorithmic trading some of these actors collectively behave in increasingly complex ways. Historically, academic research related to financial markets has been focused on areas such as asset pricing, portfolio management and financial econometrics. However, the fragmentation of the financial market has given rise to a different set of problems, namely the order allocation problem, as well as smart order routers as a tool to comply with these. In this thesis we consider price discrepancies between order books, trading the same instruments, as a proxy for order routing opportunities. A survival analysis framework for these price differences is developed. Specifically, we consider the two widely used Kaplan-Meier and Cox Proportional Hazards models, as well as the somewhat less known Random Survival Forest model, in order to investigate whether such a framework is effective for predicting the survival times of price differences. The results show that the survival models outperform random models and fixed routing decisions significantly. Thus suggesting that such models could beneficially be incorporated into existing SOR environments. Furthermore, the implementation of order book parameters as covariates in the CPH and RSF models add additional performance.

Abstract [sv]

Den moderna elektroniska marknaden består av ett stort antal aktörer som, till följd av ökningen av algoritmisk handel, beter sig alltmer komplext. Historiskt sett har akademisk forskning inom finans i huvudsak fokuserat på områden som prissättning av tillgångar, portföljförvaltning och finansiell ekonometri. Fragmentering av finansiella marknader har däremot gett upphov till nya sorters problem, däribland orderplaceringsproblemet. Följdaktligen har smart order routers utvecklats som ett verktyg för att tillmötesgå detta problem. I detta examensarbete studerar vi prisskillnader mellan orderböcker som tillhandhåller handel av samma instrument. Dessa prisskillnader representerar möjligheter för order routing. Vi utvecklar ett ramverk inom överlevnadsanalys för dessa prisskillnader. Specifikt används de välkända Kaplan-Meier- och Cox Proportional Hazards-modellerna samt den något mindre kända Random Survival Forest, för att utvärdera om ett sådant ramverk kan användas för att förutspå prisskillnadernas livstider. Våra resultat visar att dessa modeller överträffar slumpmässiga modeller samt deterministiska routingstrategier med stor marginal och antyder därmed att ett sådant ramverk kan integreras i SOR-system. Resultaten visar dessutom att användning av orderboksparametrar som variabler i CPH- och RSF-modellerna ökar prestandan.

Place, publisher, year, edition, pages
2023. , p. 81
Series
TRITA-SCI-GRU ; 2023:087
Keywords [en]
Smart Order Routing, Market Microstructure, Statistical Modelling, Survival Analysis, Kaplan-Meier, Cox Proportional Hazards, Random Survival Forest
Keywords [sv]
Smart Order Routing, Marknadsmikrostruktur, Statistisk Modellering, Överlevnadsanalys, Kaplan-Meier, Cox Proportional Hazards, Random Survival Forest
National Category
Other Mathematics
Identifiers
URN: urn:nbn:se:kth:diva-340419OAI: oai:DiVA.org:kth-340419DiVA, id: diva2:1816918
External cooperation
Nasdaq
Subject / course
Mathematical Statistics
Educational program
Master of Science - Applied and Computational Mathematics
Supervisors
Examiners
Available from: 2023-12-04 Created: 2023-12-04 Last updated: 2023-12-04Bibliographically approved

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