Simulating and analyzing a sparse order book: an application to intraday electricity markets

ArXiv ID: 2410.06839 “View on arXiv”

Authors: Unknown

Abstract

This paper presents a novel model for simulating and analyzing sparse limit order books (LOBs), with a specific application to the European intraday electricity market. In illiquid markets, characterized by significant gaps between order levels due to sparse trading volumes, traditional LOB models often fall short. Our approach utilizes an inhomogeneous Poisson process to accurately capture the sporadic nature of order arrivals and cancellations on both the bid and ask sides of the book. By applying this model to the intraday electricity market, we gain insights into the unique microstructural behaviors and challenges of this dynamic trading environment. The results offer valuable implications for market participants, enhancing their understanding of LOB dynamics in illiquid markets. This work contributes to the broader field of market microstructure by providing a robust framework adaptable to various illiquid market settings beyond electricity trading.

Keywords: limit order book, sparse LOB, Poisson process, market microstructure, intraday electricity, Electricity

Complexity vs Empirical Score

• Math Complexity: 8.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Holy Grail
• Why: The paper employs advanced stochastic processes (inhomogeneous Poisson) and references complex market microstructure theory, while also providing an empirical analysis with a specific dataset and reconstruction methods.

  flowchart TD
    A["Research Goal: Model sparse Limit Order Books for illiquid markets"] --> B["Key Methodology: Inhomogeneous Poisson Process"]
    B --> C["Data/Inputs: European Intraday Electricity Market Orders"]
    C --> D["Computational Process: Simulate Sporadic Arrivals & Cancellations"]
    D --> E["Analysis: Microstructural Behaviors & Gaps"]
    E --> F["Outcome: Robust Framework for Illiquid Markets & Insights"]