Paper: arXiv 2401.06724

Abstract

Equity auctions display several distinctive characteristics in contrast to continuous trading. As the auction time approaches, the rate of events accelerates causing a substantial liquidity buildup around the indicative price. This, in turn, results in a reduced price impact and decreased volatility of the indicative price. In this study, we adapt the latent/revealed order book framework to the specifics of equity auctions. We provide precise measurements of the model parameters, including order submissions, cancellations, and diffusion rates. Our setup allows us to describe the full dynamics of the average order book during closing auctions in Euronext Paris. These findings support the relevance of the latent liquidity framework in describing limit order book dynamics. Lastly, we analyze the factors contributing to a sub-diffusive indicative price and demonstrate the absence of indicative price predictability.

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 7.5/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs advanced mathematics, including coupled reaction-diffusion partial differential equations and closed-form dynamic solutions, to model auction dynamics. It also demonstrates high empirical rigor through meticulous calibration on high-quality tick-by-tick data from Euronext Paris, measuring specific parameters and validating the model against real-world auction characteristics.

Research Flowchart

  flowchart TD
  A["Research Goal: Adapt latent/revealed order book model to equity auctions to analyze dynamics and indicative price behavior"] --> B["Methodology: Latent/Revealed Order Book Framework"]
  B --> C["Data Input: Closing Auctions in Euronext Paris"]
  C --> D["Computational Process: Measurement of submission, cancellation, and diffusion parameters"]
  D --> E["Outcome 1: Accurate description of full order book dynamics"]
  D --> F["Outcome 2: Validated relevance of latent liquidity framework"]
  D --> G["Outcome 3: Analysis showing sub-diffusive indicative price & absence of predictability"]

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1 of 45 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.