Network dynamics of high-frequency trading data: Evidence from NASDAQ market

Shi Chen (HU Berlin, IRTG 1792)
Wednesday, November 23, 2016 - 10:00am
WIAS, Erhard-Schmidt-Saal, Mohrenstraße 39, 10117 Berlin

We propose a robust connectedness estimator for limit order books in high dimensional setting, and we argue that limit orders have significant market impacts. The estimator is constructed based on sparse precision matrix using graphical lasso, so that the regularized covariance matrix is related to connectedness measure. The microstructure noise embedded in high frequency data is removed by pre-averaging estimation. Furthermore, we provide a jump-robust estimator for connectedness of NASDAQ firms from different industrial sectors. Based on these insights, our results successfully track the network dynamics.

Joint work with Wolfgang K. Härdle, Chong Liang and Melanie Schienle