A QUANTITATIVE MODEL FOR INTRADAY STOCK PRICE CHANGES BASED ON ORDER FLOWS

This paper proposes a double Markov model of the double continuous auction for describing intra-day price changes.The model splits intra-day price changes as the repetition of one tick price moves and assumes order arrivals are independent Poisson random processes.The dynamic process of price formation is described by a birth-death process of the double M/M/1 server queue corresponding to the best bid/ask.The initial depths of the best bid and ask are defined as different constants depending on the last price change.Thus,the price changes in the model follow a first-order Markov process.As the initial depth of the best bid/ask is originally larger than that of the opposite side when the last price is down/up,the model may explain the negative autocorrelations of the price of the best bid/ask.The estimated parameters are based on the real tick-by-tick data of the Nikkei 225 futures listed in Osaka Stock Exchanges.The authors find the model accurately predicts the returns of Osaka Stock Exchange average.