Modelling order arrivals at price limits using Hawkes processes

Some financial market regulators utilize a price limit mechanism. A number of past studies show that the price limit mechanism has a considerable impact on investors' behaviour. The altered mechanism per se, and its impact on investors' behaviour, change the order flow dynamics at price limit hits. We have proposed a model using Hawkes processes to model order arrivals when market dynamics switch to price limit hits. Goodness of fit tests showed that the model appropriately captures order arrival dynamics of intraday data from the Tehran Securities Exchange (TSE), which is a volatile market with narrow banded price limits (+/- 4). (C) 2016 Elsevier Inc. All rights reserved