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Predicting future price volatility: Empirical evidence from an emerging limit order market

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  • Jain, Pawan
  • Jiang, Christine

Abstract

We investigate the information content of the limit order book (LOB) on the Shanghai Stock Exchange (SHSE), a purely order-driven market. We find strong evidence that the LOB slope consistently and significantly predicts the future price volatility. However, this predictive power of the LOB declines during extreme market-wide movements. We also find that buy orders are more informative for future price volatility than sell orders, but sell (buy) orders become more informative during extreme market-wide down (up) movement days. Finally, we document that the predictive power of the LOB is short lived and markets are efficient over the longer time horizon. These results are helpful in understanding market efficiency and the traders' order submission strategies on the fast growing market of SHSE.

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  • Jain, Pawan & Jiang, Christine, 2014. "Predicting future price volatility: Empirical evidence from an emerging limit order market," Pacific-Basin Finance Journal, Elsevier, vol. 27(C), pages 72-93.
    • Handle: RePEc:eee:pacfin:v:27:y:2014:i:c:p:72-93
    DOI: 10.1016/j.pacfin.2014.01.006
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    9. Zhao, Shangmei & Chen, Xinyi & Zhang, Junhuan, 2019. "The systemic risk of China’s stock market during the crashes in 2008 and 2015," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 520(C), pages 161-177.
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    More about this item

    Keywords

    Limit order book; Volatility; Slope; Cost-to-trade; High frequency; Intra-day; Shanghai Stock Exchange; Extreme market condition;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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