The Dynamics of Ex-Ante Weighted Spread: An Empirical Analysis
Quantitative Finance 20, 4, 593-617, 2020
Posted: 16 Nov 2016 Last revised: 5 Jan 2023
Date Written: November 4, 2019
Abstract
We model the evolution of the ex-ante weighted spread (EWS) embedded in an open Limit Order Book (LOB) and investigate the impact of observed market-related variables on the spread. Our modeling involves decomposing the joint distribution of the weighted spread into simple and interpretable distributions. Our main results have several implications: (i) EWS features high persistence in autocorrelation; (ii) lower-level LOB remains liquid even after a high trade imbalance; (iii) lower- and higher-level LOB react to temporal spread change and trade imbalance in different ways; and (iv) both trade durations and quote durations have seasonality effects. We also show, through a simple high frequency trading exercise, that the use of the model can be economically important. Further, our model provides an estimation of market resilience.
Keywords: Limit order book, Ex-ante weighted spread, Decomposition model, Liquidity, Resilience
JEL Classification: C22, C41, C53, G11
Suggested Citation: Suggested Citation