Limit Order Book Dynamics with Large Executions (Financial Modeling and Analysis)

Abstract

We provide an endogenous model of limit order book dynamics to be applicable to the execution problem of large investors such as institutional investors. For the ask (bid) side limit order book formed by patient sellers (buyers), we consider the trading information of large investors will be incorporated into the bid (ask) side best price in order to make the limit order book consistent throughout the trading period. By giving the best price exogenously, it is possible to characterize the actions of patient sellers or buyers and identify the shape of the limit order book. As a result, it can be applied to the optimal execution problem.