The Market Impact of a Limit Order

45 Pages Posted: 16 Sep 2010 Last revised: 10 Oct 2011

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research

Ruihong Huang

Humboldt University of Berlin

Date Written: June 21, 2011

Abstract

We quantify the short-run and long-run price effect of posting a limit order in an order book market based on a specific high-frequency cointegrated VAR model for quotes and order book depths. By estimating impulse response functions based on data from 30 stocks traded at Euronext Amsterdam we show that limit orders have significant market impacts. The strength and direction of quote responses depend on the incoming orders' aggressiveness, their size and the state of the book. The effects are qualitatively stable across the market. Cross-sectional variations in the magnitudes of price impacts are well explained by the underlying trading frequency and relative tick size.

Keywords: price impact, limit order, impulse response function, high-frequency cointegration

JEL Classification: G14, C32, G17

Suggested Citation

Hautsch, Nikolaus and Huang, Ruihong, The Market Impact of a Limit Order (June 21, 2011). Journal of Economic Dynamics and Control, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1677343 or http://dx.doi.org/10.2139/ssrn.1677343

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research ( email )

Kolingasse 14
Vienna, A-1090
Austria

Ruihong Huang (Contact Author)

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

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