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Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong

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  • Hee‐Joon Ahn
  • Kee‐Hong Bae
  • Kalok Chan

Abstract

We investigate the role of limit orders in the liquidity provision in a pure order‐driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit‐order traders who enter the market and place orders when liquidity is needed.

Suggested Citation

  • Hee‐Joon Ahn & Kee‐Hong Bae & Kalok Chan, 2001. "Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong," Journal of Finance, American Finance Association, vol. 56(2), pages 767-788, April.
    • Handle: RePEc:bla:jfinan:v:56:y:2001:i:2:p:767-788
    DOI: 10.1111/0022-1082.00345
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