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Relative Liquidity and Future Volatility

Author

Listed:
  • Piotr Fryzlewicz
  • Thorsten Rheinlander
  • Marcela Valenzuela
  • Ilknur Zer

Abstract

The main contribution of this paper is to identify the strong predictive power of the relative concentration of depth provision, rather than volume of orders, over volatility. To this end, we propose a new measure, relative liquidity (RLIQ), which extracts information from a limit order book distribution and captures the level of consensus on a security's trading price. Higher liquidity provision farther away from the best quotes, relative to the rest of the book, is associated with a disagreement on the current price and followed by high volatility. The relationship is robust to the inclusion of several alternative measures.

Suggested Citation

  • Piotr Fryzlewicz & Thorsten Rheinlander & Marcela Valenzuela & Ilknur Zer, 2014. "Relative Liquidity and Future Volatility," Finance and Economics Discussion Series 2014-45, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2014-45
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    References listed on IDEAS

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    More about this item

    Keywords

    Order-driven markets; limit order book distribution; volatility predictability; liquidity;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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