Limit order book and its modeling in terms of Gibbs Grand-Canonical Ensemble

•Gibbs Grand-Canonical Ensemble concepts and Bose statistics are applied to the limit order book process.•Distributions (volume vs. price) for demand and supply proposals are derived.•A meaningful definition of temperature for demand and supply ensembles is derived.•Supply–demand temperature difference is in direct correspondence with an oscillator used in Technical Analysis.

In the domain of so called Econophysics some attempts have been already made for applying the theory of thermodynamics and statistical mechanics to economics and financial markets. In this paper a similar approach is made from a different perspective, trying to model the limit order book and price formation process of a given stock by the Grand-Canonical Gibbs Ensemble for the bid and ask orders. The application of the Bose–Einstein statistics to this ensemble allows then to derive the distribution of the sell and buy orders as a function of price. As a consequence we can define in a meaningful way expressions for the temperatures of the ensembles of bid orders and of ask orders, which are a function of minimum bid, maximum ask and closure prices of the stock as well as of the exchanged volume of shares. It is demonstrated that the difference between the ask and bid orders temperatures can be related to the VAO (Volume Accumulation Oscillator), an indicator empirically defined in Technical Analysis of stock markets. Furthermore the derived distributions for aggregate bid and ask orders can be subject to well defined validations against real data, giving a falsifiable character to the model.