Commonalities in the Order Book
Helena M. Beltran-Lopez
Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)
Facultés Universitaires Notre-Dame de la Paix (FUNDP)
Eberhard Karls Universitaet Tübingen; Center for Financial Studies (CfS); Centre for Financial Research (CfR)
July 18, 2009
Financial Markets and Portfolio Management, Vol. 23, No. 3, pp. 209-242, 2009
This paper uses data from one of the most important European stock markets and shows that, in line with predictions from theoretical market microstructure, a small number of latent factors captures most of the variation in stock specific order books. We show that these order book commonalities are much stronger than liquidity commonality across stocks. The result that bid and ask side as well as the visible and hidden parts of the order book exhibit quite specific dynamics is interpreted as evidence that open order book markets attract a heterogeneous trader population in terms of asset valuations and impatience. Quantifying the informational content of the extracted factors with respect to the evolution of the asset price, we find that the factor information shares are highest (about 10%) for less frequently traded stocks. We also show that the informational content of hidden orders is limited.
Keywords: Limit order book, Commonalities, Liquidity, Market microstructure
JEL Classification: G10, C32Accepted Paper Series
Date posted: June 20, 2010
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.266 seconds