Vast network analysis of Limit Order Books

Shi Chen (HU Berlin)
Wednesday, May 17, 2017 - 10:00am
WIAS, Erhard-Schmidt-Saal, Mohrenstraße 39, 10117 Berlin

We propose vast network estimators for limit order books in high dimensional setting, and we argue that limit orders have significant market impacts. Both undirected and directed network estimators are constructed based on consistent estimator for covariance matrix. Furthermore, the undirected estimator is constructed with sparse concentration matrix using graphical lasso, so that the regularized covariance matrix is related to connectedness measure. The directed one is derived from VAR model through penalized variance decomposition. The microstructure noise embedded in high frequency data is removed by pre-averaging estimation. We also discuss in details the data transformation process. Based on these insights, our results successfully track the network dynamics.