Published Paper Details:

Intraday financial markets witness significant fluctuation of prices, which can be rather unpredictable with the use of traditional statistical or econometric modeling. Traditional approaches to forecasting do not take into consideration structural aspects of market liquidity and its influence on trading by institutions. This research attempts to develop an integrated approach based on principles of Market Microstructure and Quantitative Finance for analysis of interaction between liquidity distribution across the price levels and large institutional orders leading to creation of liquidity vacuums that cause price acceleration. Intraday trading in stock market is analyzed under the theoretical and mathematical frameworks that consider how distribution of liquidity along the price levels impacts formation of liquidity vacuums and consequent generation of price acceleration. Liquidity vacuums are considered as zones characterized by insufficient market depth to handle incoming orders, which leads to quick price acceleration. A liquidity mapping model is formulated for determination of liquidity density and existence of liquidity gaps in the limit order book. These liquidity gaps are then associated with institutional trading activities indicating high probability of creation of liquidity vacuums, triggered by large order executions. Mathematical modeling of liquidity imbalance and corresponding order flow pressure leading to expected price acceleration is suggested. In addition, the research outlines a methodology for empirical validation that utilizes intraday high-frequency data to verify the predictive ability of the liquidity vacuum signal. It is anticipated that the findings will indicate that the inclusion of the liquidity structure and institutional orders greatly increases the accuracy of price predictions within intraday periods relative to traditional time series models..