JOURNAL OF FINANCIAL ECONOMETRICS (Winter 2014) 12 (1): 47-88.
32 Pages Posted: 28 Nov 2010 Last revised: 17 Sep 2015
Date Written: April 30, 2012
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: 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
By Rama Cont