Early Detection of Latent Microstructure Regimes in Limit Order Books

• URL: http://arxiv.org/abs/2604.20949v1
• Date: Wed, 22 Apr 2026 17:47:52 GMT
• Title: Early Detection of Latent Microstructure Regimes in Limit Order Books
• Abstract summary: Limit order books can transition rapidly from stable to stressed conditions.<n>Standard early-warning signals such as order flow imbalance and short-term volatility are inherently reactive.<n>We formalise this limitation via a three-regime causal data-generating process.
• Score: 0.0
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: Limit order books can transition rapidly from stable to stressed conditions, yet standard early-warning signals such as order flow imbalance and short-term volatility are inherently reactive. We formalise this limitation via a three-regime causal data-generating process (stable $\to$ latent build-up $\to$ stress) in which a latent deterioration phase creates a prediction window prior to observable stress. Under mild assumptions on temporal drift and regime persistence, we establish identifiability of the latent build-up regime and derive guarantees for strictly positive expected lead-time and non-trivial probability of early detection. We propose a trigger-based detector combining MAX aggregation of complementary signal channels, a rising-edge condition, and adaptive thresholding. Across 200 simulations, the method achieves mean lead-time $+18.6 \pm 3.2$ timesteps with perfect precision and moderate coverage, outperforming classical change-point and microstructure baselines. A preliminary application to one week of BTC/USDT order book data shows consistent positive lead-times while baselines remain reactive. Results degrade in low signal-to-noise and short build-up regimes, consistent with theory.

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