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...amics of prices in such markets are not only interesting from the viewpoint of market participants –for trading and order execution (Alfonsi et al. (2010), Predoiu et al. (2011))– but also from a fundamental perspective, since they provide a rare glimpse into the dynamics of supply and demand and their role in price formation. Equilibrium models of price formation in limit order markets (Parlour (1998), Rosu (2009)) have shown that the evolution of the price in such markets is rather complex and depends on the state of the order book. On the other hand, empirical studies on limit order books (Bouchaud et al. (2008), Farmer et al. (2004), Gourieroux et al. (1999), Hollifield et al. (2004), Smith et al. (2003)) provide an extensive list of statistical features of order book dynamics that are challenging to incorporate in a single model. While most of these studies have focused on unconditional/steady– state distributions of various features of the order book, empirical studies (see e.g. Harris and Panchapagesan (2005)) show that the state of the order book contains information on short-term price movements so it is of interest to provide forecasts of various quantities conditional on the state of the orde...

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...actual trade prices looks much flatter compared to the simulation (See figure 9.) This was discovered and discussed in detail by Bouchaud et al. in [3], and Lillo and Farmer in [13] (See also [9] and =-=[2]-=-.) They note that actual order signs exhibit positive long-ranged correlations. They also note that actual prices are diffusive—the signature plot is flat—even at small time scales. They solve this ap...

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...etical evidence indicates that market impact for large trades is a concave function of the number of traded shares, which under normal conditions impact is well approximated by a square-root function =-=[21]-=-. By normal conditions we mean that execution is slow enough for the order book to replenish between successive trades. Under extreme conditions, like those of a fire sale, market impact is expected t...

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...me-dependent base intensity. 2 Trades-through 2.1 Orders splitting and trades-through It has been shown several times that the time series built from trading flows are long-memory processes (see e.g. =-=Bouchaud et al., 2009-=-). Lillo and Farmer (2004) argue that this is mainly explained by the splitting of large orders. Indeed, let us assume that a trader wants to trade a large order. He does not want to reveal its intent...

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...etween the two variables along this period is 0.62. One can also note that markets are much more correlated after the period of crisis, and this behavior tends to endure for some time after the crash =-=[154]-=-, although one must take into account that the averaging procedure for the average correlation makes the curve smoother and thus decreasing less steeply. Figure 12 shows the evolution of the covarianc...

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...titative model of market impact Understanding the nature of market impact has now been the focus of a large number of empirical studies, both from academics and practitioners (for recent reviews, see =-=[11, 12, 3, 4, 13, 14, 5]-=-), and a consensus is beginning to emerge. Here we are particularly concerned with the liquidation of large positions, which must either be sold in a block market or broken into pieces and executed in...