Limit Orders, Depth, and Volatility

Posted: 25 Jan 2001

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Hee-Joon Ahn

Sookmyung Women's University - Division of Business Administration; Sungkyunkwan University

Kalok Chan

CUHK Business School

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Abstract

We investigate the role of limit orders in the liquidity provision in the Hong Kong stock market, which is based on a computerized limit-order trading system. Consistent with Handa and Schwartz (1996), results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed.

JEL Classification: G12, G14

Suggested Citation

Bae, Kee-Hong and Ahn, Hee-Joon and Chan, Kalok, Limit Orders, Depth, and Volatility. As published in Journal of Finance. Available at SSRN: https://ssrn.com/abstract=220348

Kee-Hong Bae (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Hee-Joon Ahn

Sookmyung Women's University - Division of Business Administration ( email )

Korea, Republic of (South Korea)

Sungkyunkwan University

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

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