Dynamic order dispersion and volatility persistence in a simple limit order book model

This preliminary paper extends the dynamics of a basic stylized limit order book model introduced in Chiarella & Iori (2002). The original model is capable of generating some key market microstructure features, but it cannot recreate longer range persistence in volatility. We explore a very simple and intuitive addition to the stylized, near zero intelligence behavior of traders that is capable of delivering persistent volatility. We also show that this strategy depends critically on certain key features in the dynamics of supply and demand for liquidity and depth in the limit order book. We believe this is fundamental to understanding both the dynamics of volatility in financial time series, along with variations in liquidity in financial markets. We contribute a parsimonious agent-based model to the literature that may be used as a test bed or sandbox for developing agents with more complex behavior.