What is Hawkes process in finance?
Hawkes process is a mathematical model in finance that describes the clustering behavior of events over time. It is a self-exciting process, meaning that each event increases the probability of subsequent events occurring, creating clusters of events.
In finance, Hawkes process often becomes used to model the arrival of financial transactions such as trades or orders in a market.
Moreover, it has become used to model the arrival of order flow in stock markets. The occurrence of credit events in credit risk models, and the timing of defaults in default risk models.
Hawkes process is named after the mathematician Alan Hawkes, as a result of Hawkes introducing it in the 1970s.
The process is based on the concept of conditional intensity, which is a function that describes the instantaneous rate at which events occur given the history of the process up to that point in time.
In conclusion, Hawkes gained popularity in finance due to its ability for capturing the clustering behavior of events in a market. Which is an important characteristic of financial data. Lastly, it has also become used in algorithmic trading strategies. Lastly where it became used to predict the arrival of market orders based on past trading data.
