The Price Impact of Order Book Events

JOURNAL OF FINANCIAL ECONOMETRICS (Winter 2014) 12 (1): 47-88.

32 Pages Posted: 28 Nov 2010 Last revised: 17 Sep 2015

See all articles by Rama Cont

Rama Cont

University of Oxford; CNRS

Arseniy Kukanov

AQR Capital Management, LLC

Sasha Stoikov

Cornell Financial Engineering Manhattan

Date Written: April 30, 2012

Abstract

We study the price impact of order book events - limit orders, market orders and cancelations - using the NYSE TAQ data for 50 U.S. stocks. We show that, over short time intervals, price changes are mainly driven by the order flow imbalance, defined as the imbalance between supply and demand at the best bid and ask prices. Our study reveals a linear relation between order flow imbalance and price changes, with a slope inversely proportional to the market depth. These results are shown to be robust to intraday seasonality effects, and stable across time scales and across stocks. This linear price impact model, together with a scaling argument, implies the empirically observed "square-root" relation between the magnitude of price moves and trading volume. However, the latter relation is found to be noisy and less robust than the one based on order flow imbalance. We discuss a potential application of order flow imbalance as a measure of adverse selection in limit order executions, and demonstrate how it can be used to analyze intraday volatility dynamics.

Keywords: limit order book, market microstructure, liquidity, price impact, trading volume, equity markets, eletronic markets, high frequency data

JEL Classification: C58, G12

Suggested Citation

Cont, Rama and Kukanov, Arseniy and Stoikov, Sasha, The Price Impact of Order Book Events (April 30, 2012). JOURNAL OF FINANCIAL ECONOMETRICS (Winter 2014) 12 (1): 47-88.. Available at SSRN: https://ssrn.com/abstract=1712822 or http://dx.doi.org/10.2139/ssrn.1712822

Rama Cont (Contact Author)

University of Oxford ( email )

Mathematical Institute
Oxford, OX2 6GG
United Kingdom

HOME PAGE: http://https://www.maths.ox.ac.uk/people/rama.cont

CNRS ( email )

LPSM
Sorbonne University
Paris
France

HOME PAGE: http://rama.cont.perso.math.cnrs.fr/

Arseniy Kukanov

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Sasha Stoikov

Cornell Financial Engineering Manhattan ( email )

2 W Loop Rd
New York, NY New York 10044
United States

HOME PAGE: http://www.sashastoikov.com

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