Deep Order Flow Imbalance: Extracting Alpha at Multiple Horizons from the Limit Order Book

43 Pages Posted: 9 Aug 2021

See all articles by Petter N. Kolm

Petter N. Kolm

New York University (NYU) - Courant Institute of Mathematical Sciences

Jeremy Turiel

University College London

Nicholas Westray

Courant Institute of Mathematical Sciences

Date Written: August 5, 2021

Abstract

We employ deep learning in forecasting high-frequency returns at multiple horizons for 115 stocks traded on Nasdaq using order book information at the most granular level. While raw order book states can be used as input to the forecasting models, we achieve state-of-the-art predictive accuracy by training simpler "off-the-shelf" artificial neural networks on stationary inputs derived from the order book. Specifically, models trained on order flow significantly outperform most models trained directly on order books. Using cross-sectional regressions we link the forecasting performance of a long short-term memory network to stock characteristics at the market microstructure level, suggesting that "information-rich" stocks can be predicted more accurately. Finally, we demonstrate that the effective horizon of stock specific forecasts is approximately two average price changes.

Keywords: Artificial neural networks, Deep learning, Financial machine learning, High-frequency trading, Limit order books, Market microstructure, Multiple horizons, Order flow, Return predictability

JEL Classification: C45, C51, C53, C61, D49, G10, G11, G12, G14

Suggested Citation

Kolm, Petter N. and Turiel, Jeremy and Westray, Nicholas, Deep Order Flow Imbalance: Extracting Alpha at Multiple Horizons from the Limit Order Book (August 5, 2021). Available at SSRN: https://ssrn.com/abstract=3900141 or http://dx.doi.org/10.2139/ssrn.3900141

Petter N. Kolm (Contact Author)

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States

Jeremy Turiel

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Nicholas Westray

Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY - 10012
United States

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