Does the Open Limit Order Book Matter in Explaining Informational Volatility?

Posted: 28 Dec 2009

See all articles by Roberto Pascual

Roberto Pascual

Universidad de las Islas Baleares

David Veredas

Vlerick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: Winter 2010

Abstract

We evaluate the informational content of the open limit order book by studying its role in explaining the volatility of the efficient price. We separate transitory (liquidity-driven) volatility from informational (efficient price-related) volatility using a dynamic state-space co-integration model for ask and bid quotes. Consistently with Foucault, Moinas, and Theissen (2007, Review of Financial Studies), we show that for any given trade size, the higher the round-trip costs, the higher the ex post informational volatility. Other pieces of the LOB, such as quoted depth, both at and away from the best quotes, and the book imbalance, are also informative.

Keywords: G1, limit order book, market microstructure, order-driven markets, price formation, state-space models, volatility

Suggested Citation

Pascual Gascó, Roberto and Veredas, David, Does the Open Limit Order Book Matter in Explaining Informational Volatility? (Winter 2010). Journal of Financial Econometrics, Vol. 8, Issue 1, pp. 57-87, 2010, Available at SSRN: https://ssrn.com/abstract=1528359 or http://dx.doi.org/nbp021

Roberto Pascual Gascó (Contact Author)

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

David Veredas

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
742
PlumX Metrics