A behavioural model of investor sentiment in limit order markets

Publication Type:
Journal Article
Quantitative Finance, 2017, 17 (1), pp. 71 - 86
Issue Date:
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© 2016 Informa UK Limited, trading as Taylor & Francis Group. By incorporating behavioural sentiment in a model of a limit order market, we show that behavioural sentiment not only helps to replicate most of the stylized facts in limit order markets simultaneously, but it also plays a unique role in explaining those stylized facts that cannot be explained by noise trading, such as fat tails in the return distribution, long memory in the trading volume, an increasing and non-linear relationship between trade imbalance and mid-price returns, as well as the diagonal effect, or event clustering, in order submission types. The results show that behavioural sentiment is an important driving force behind many of the well-documented stylized facts in limit order markets.
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