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Does the open limit order book matter in explaining long run volatility ?

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  • PASCUAL, Roberto
  • VEREDAS, David

Abstract

This paper evaluates the informational content of an open limit order book by studying its role in explaining long run volatility. We separate liquidity-driven (transitory) volatility from information-driven (long run) volatility using a dynamic state-space co-integration model for ask and bid quotes. We report that changes in immediacy costs precede posterior fluctuations in long run volatility even after controlling for the incoming order flow. The book is less informative for large-caps than for small-caps. Consistently with previous studies, the book beyond the best quotes adds explanatory power to the best quotes. Finally, the explanatory power of the book decreases with the time resolution of the analysis.

Suggested Citation

  • PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," LIDAM Discussion Papers CORE 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2006110
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    Cited by:

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    2. 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.
    3. repec:hum:wpaper:sfb649dp2010-005 is not listed on IDEAS
    4. Roberto Pascual & David Veredas, 2009. "What pieces of limit order book information matter in explaining order choice by patient and impatient traders?," Quantitative Finance, Taylor & Francis Journals, vol. 9(5), pages 527-545.

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    More about this item

    Keywords

    limit order book; volatility; electronic order-driven markets; state-sapce models; price formation; market microstructure;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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