Duration and Order Type Clusters When Traders React and on which Market Side

This paper introduces a new bivariate autoregressive conditional framework (ACD×ACL) for modelling the arrival process of buy and sell orders in a limit order book. The model contains two dynamic components to describe the observed clustering of durations and order types: a duration process to capture the time structure, combined with a new “Autoregressive Conditional Logit ” model in order to display the traders ’ order choice. Both processes are adapted to a common natural filtration and modelled simultaneously. It can be shown that the state of the order book as well as the success and the speed of the matching process have a significant influence on the traders ’ decisions when and on which side of the market to submit orders and, thus, affect the market’s liquidity