High-Frequency Stock Market Order Transitions during the US-China Trade War 2018: A Discrete-Time Markov Chain Analysis

ArXiv ID: 2405.05634 “View on arXiv”

Authors: Unknown

Abstract

Statistical analysis of high-frequency stock market order transaction data is conducted to understand order transition dynamics. We employ a first-order time-homogeneous discrete-time Markov chain model to the sequence of orders of stocks belonging to six different sectors during the USA-China trade war of 2018. The Markov property of the order sequence is validated by the Chi-square test. We estimate the transition probability matrix of the sequence using maximum likelihood estimation. From the heat-map of these matrices, we found the presence of active participation by different types of traders during high volatility days. On such days, these traders place limit orders primarily with the intention of deleting the majority of them to influence the market. These findings are supported by high stationary distribution and low mean recurrence values of add and delete orders. Further, we found similar spectral gap and entropy rate values, which indicates that similar trading strategies are employed on both high and low volatility days during the trade war. Among all the sectors considered in this study, we observe that there is a recurring pattern of full execution orders in Finance & Banking sector. This shows that the banking stocks are resilient during the trade war. Hence, this study may be useful in understanding stock market order dynamics and devise trading strategies accordingly on high and low volatility days during extreme macroeconomic events.

Keywords: high-frequency trading, Markov chains, order book dynamics, maximum likelihood estimation, market microstructure

Complexity vs Empirical Score

• Math Complexity: 6.0/10
• Empirical Rigor: 3.0/10
• Quadrant: Lab Rats
• Why: The paper employs discrete-time Markov chains, spectral analysis, and statistical hypothesis testing (Chi-square), indicating moderate mathematical complexity. However, it lacks implementation details, backtests, or specific datasets, and the empirical findings are presented as theoretical observations rather than actionable trading results.

  flowchart TD
    A["Research Goal: Analyze HFT order transitions<br>during 2018 US-China Trade War"] --> B["Data: High-frequency order book data<br>from 6 sectors"]
    B --> C["Methodology: Discrete-Time Markov Chain<br>+ Chi-square test + MLE"]
    C --> D{"Computational Processes"}
    D --> E["Estimate Transition Matrices"]
    D --> F["Calculate Stationary Distributions"]
    D --> G["Compute Spectral Gap & Entropy"]
    E --> H["Findings"]
    F --> H
    G --> H
    H --> I["Active participation by traders on high volatility days"]
    H --> J["Similar strategies used on both high/low volatility days"]
    H --> K["Finance & Banking sector shows resilience<br>(recurring full execution orders)"]