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The Price Impact of Order Book Events

Author

Listed:
  • Rama Cont
  • Arseniy Kukanov
  • Sasha Stoikov

Abstract

We study the price impact of order book events—limit orders, market orders, and cancellations—using the NYSE Trades and Quotes data for fifty U.S. stocks. We show that, over short time intervals, price changes are mainly driven by the order flow imbalance (OFI), defined as the imbalance between supply and demand at the best bid and ask prices. Our study reveals a linear relation between OFI and price changes, with a slope inversely proportional to the market depth. These results are shown to be robust to intraday seasonality effects, and stable across time scales and across stocks. This linear price impact model, together with a scaling argument, implies the empirically observed “square-root” relation between the magnitude of price moves and trading volume, but this relation is found to be noisy and less robust than the one based on OFI. We discuss a potential application of OFI as a measure of adverse selection in limit order executions and discuss the implications for intraday volatility dynamics.

Suggested Citation

  • Rama Cont & Arseniy Kukanov & Sasha Stoikov, 2014. "The Price Impact of Order Book Events," Journal of Financial Econometrics, Oxford University Press, vol. 12(1), pages 47-88.
    • Handle: RePEc:oup:jfinec:v:12:y:2014:i:1:p:47-88.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbt003
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    More about this item

    Keywords

    high frequency data; liquidity; limit order book; market microstructure; price impact;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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