Long Memory and Order Flow in a Simulated Financial Market

<p dir="ltr">This study implements the λ-model and the fixed-N model as proposed in A Theory for Long-Memory in Supply and Demand by Lillo, Mike and Farmer, to investigate whether long-memory in order flow arises from delays in market clearing. Using the fixed-N model, we construct the autocorrelation function of revealed order signs and find that the sequence of order signs exhibits power-law decaying autocorrelations, consistent with empirical findings. The λ-model is employed to explore fluctuations in market liquidity by varying the number of hidden orders over time. Through simulation, we generate synthetic data to build and analyse these models, using the results to test the central hypothesis concerning the origin of long memory in financial markets.</p><p dir="ltr">All associated R code, figures, and supplementary files are available on GitHub:<br>��<a href="https://github.com/SayuriUCT/HonoursProject" target="_blank">SayuriUCT/HonoursProject</a></p>