The Predictive Power of Limit Order Book for Future Volatility, Trade Price, and Speed of Trading

47 Pages Posted: 22 Mar 2011

See all articles by Pankaj K. Jain

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Pawan Jain

University of Wyoming - College of Business - Department of Economics and Finance

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Date Written: March 15, 2011

Abstract

We investigate the information content of the limit order book (LOB) on the Tokyo Stock Exchange, the world’s second largest order-driven exchange1. Microstructure parameters, such as the current cost-to-trade 1% of average daily volume and order book slope, consistently and significantly predict future price volatility, trade prices, and speed of trading. The shape of the LOB on the bid side carries more predictive power than that on the ask side. We also document that the average trade size is the driving force in the standard volume-volatility relationship.

Keywords: Tokyo Stock Exchange, Future trade prices, volatility, trading speed

Suggested Citation

Jain, Pankaj K. and Jain, Pawan and McInish, Thomas H., The Predictive Power of Limit Order Book for Future Volatility, Trade Price, and Speed of Trading (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1787625 or http://dx.doi.org/10.2139/ssrn.1787625

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Pawan Jain (Contact Author)

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

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