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Forecasting limit order book price changes using change point detection

Thorburn, Sebastian LU (2015) NEKM01 20151
Department of Economics
Abstract
The main purpose of this thesis is to propose a method for using a change point detection algorithm to forecast short term limit order book price changes. The idea is to test whether a significant change of the shape of the limit order book contains any information about impending changes to mid market. Using a data set consisting of all the changes of the limit order book throughout the trading day, a change point detection algorithm is used to detect what is deemed to be significant changes of the shape of the limit order book. A measurement of the limit order imbalance is constructed as a proxy for the shape of the order book which then is used as input signal to the change point detection algorithm. A new data set is created based on... (More)
The main purpose of this thesis is to propose a method for using a change point detection algorithm to forecast short term limit order book price changes. The idea is to test whether a significant change of the shape of the limit order book contains any information about impending changes to mid market. Using a data set consisting of all the changes of the limit order book throughout the trading day, a change point detection algorithm is used to detect what is deemed to be significant changes of the shape of the limit order book. A measurement of the limit order imbalance is constructed as a proxy for the shape of the order book which then is used as input signal to the change point detection algorithm. A new data set is created based on the detected change points and a regression is run based on these to forecast price changes. It is found that the change point data set contains a certain amount of information about impending price changes. (Less)
Please use this url to cite or link to this publication:
author
Thorburn, Sebastian LU
supervisor
organization
course
NEKM01 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
Change point detection, high frequency finance, limit order book, market microstructure, econometrics
language
English
id
7373719
date added to LUP
2015-06-30 11:15:49
date last changed
2015-06-30 11:15:49
@misc{7373719,
  abstract     = {The main purpose of this thesis is to propose a method for using a change point detection algorithm to forecast short term limit order book price changes. The idea is to test whether a significant change of the shape of the limit order book contains any information about impending changes to mid market. Using a data set consisting of all the changes of the limit order book throughout the trading day, a change point detection algorithm is used to detect what is deemed to be significant changes of the shape of the limit order book. A measurement of the limit order imbalance is constructed as a proxy for the shape of the order book which then is used as input signal to the change point detection algorithm. A new data set is created based on the detected change points and a regression is run based on these to forecast price changes. It is found that the change point data set contains a certain amount of information about impending price changes.},
  author       = {Thorburn, Sebastian},
  keyword      = {Change point detection,high frequency finance,limit order book,market microstructure,econometrics},
  language     = {eng},
  note         = {Student Paper},
  title        = {Forecasting limit order book price changes using change point detection},
  year         = {2015},
}