Modeling metaorder impact with a Non-Markovian Zero Intelligence model

Devising models of the limit order book that realistically reproduce the market response to exogenous trades is extremely challenging and fundamental in order to test trading strategies. We propose a novel explainable model for small tick assets, the Non-Markovian Zero Intelligence, which is a variant of the well-known Zero Intelligence model. The main modification is that the probability of limit orders’ signs (buy/sell) is not constant but is a function of the exponentially weighted mid-price return, representing the past price dynamics, and can be interpreted as the reaction of traders with reservation prices to the price trend. With numerical simulations and analytical arguments, we show that the model predicts a concave price path during a metaorder execution and to a price reversion after the execution ends, as empirically observed. We analyze in-depth the mechanism at the root of the arising concavity, the components which constitute the price impact in our model, and the dependence of the results on the two main parameters, namely the time scale and the strength of the reaction of traders to the price trend.

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Publication Details

Journal
Physica A Statistical Mechanics and its Applications
Published
2025-10-17
DOI
https://doi.org/10.1016/j.physa.2025.131056
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
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article

Modeling metaorder impact with a Non-Markovian Zero Intelligence model

Fabrizio Lillo, Adele Ravagnani
Physica A Statistical Mechanics and its Applications
Financial Markets and Investment Strategies
article

Modeling metaorder impact with a Non-Markovian Zero Intelligence model

Fabrizio Lillo, Adele Ravagnani
article en

Abstract

Devising models of the limit order book that realistically reproduce the market response to exogenous trades is extremely challenging and fundamental in order to test trading strategies. We propose a novel explainable model for small tick assets, the Non-Markovian Zero Intelligence, which is a variant of the well-known Zero Intelligence model. The main modification is that the probability of limit orders’ signs (buy/sell) is not constant but is a function of the exponentially weighted mid-price return, representing the past price dynamics, and can be interpreted as the reaction of traders with reservation prices to the price trend. With numerical simulations and analytical arguments, we show that the model predicts a concave price path during a metaorder execution and to a price reversion after the execution ends, as empirically observed. We analyze in-depth the mechanism at the root of the arising concavity, the components which constitute the price impact in our model, and the dependence of the results on the two main parameters, namely the time scale and the strength of the reaction of traders to the price trend.

Physica A Statistical Mechanics and its ApplicationsVol. 681
Openalex Percentile: Top 62%
Financial Markets and Investment Strategies
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