The Market Impact of a Limit Order
45 Pages Posted: 16 Sep 2010 Last revised: 10 Oct 2011
Date Written: June 21, 2011
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
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