Evolution of Volatility, Trade Price Location, Correlations, and Speed of Trading in the Limit Order Book

53 Pages Posted: 22 Aug 2011 Last revised: 20 Feb 2012

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: January 18, 2012

Abstract

We investigate the information content of the limit order book (LOB) on the Tokyo Stock Exchange, the world’s second largest order-driven market. We find that high frequency microstructure parameters, such as the current cost-to-trade 1% of average daily volume and LOB slope, contain information about future trade price location, price volatility, speed of trading, return autocorrelation and cross-correlation. We also document that the average trade size in LOB is the driving force in the standard volume–volatility relationship, which is contrary to previous findings for other markets. These results are helpful in understanding the price discovery process in a purely order driven market and have potential applications in academics and industry for optimizing the order submission strategies.

Keywords: Limit order book, Liquidity, Volatility

JEL Classification: G10

Suggested Citation

Jain, Pankaj K. and Jain, Pawan and McInish, Thomas H., Evolution of Volatility, Trade Price Location, Correlations, and Speed of Trading in the Limit Order Book (January 18, 2012). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1913982 or http://dx.doi.org/10.2139/ssrn.1913982

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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