Relative Liquidity and Future Volatility

37 Pages Posted: 29 Jun 2014 Last revised: 28 Feb 2015

See all articles by Marcela Valenzuela

Marcela Valenzuela

Pontificia Universidad Católica de Chile

Ilknur Zer

Board of Governors of the Federal Reserve System

Piotr Fryzlewicz

London School of Economics & Political Science (LSE) - Department of Statistics

Thorsten Rheinlander

Vienna University of Technology

Date Written: February 27, 2015

Abstract

The main contribution of this paper is to identify the strong predictive power of the relative, rather than the absolute, volume of orders over volatility. To this end, we propose a new measure, relative liquidity, which accounts for how quoted depth is distributed in a limit order book and captures the level of consensus on a security's trading price. Higher liquidity provision farther away from the best quotes, relative to the rest of the book, is associated with a disagreement on the current price and followed by high volatility. The relationship is robust to the inclusion of several alternative measures.

Keywords: order-driven markets, limit order book distribution, volatility predictability, liquidity

JEL Classification: G1, G20

Suggested Citation

Valenzuela, Marcela and Zer, Ilknur and Fryzlewicz, Piotr and Rheinlander, Thorsten, Relative Liquidity and Future Volatility (February 27, 2015). Journal of Financial Markets, Forthcoming, FEDS Working Paper 2014-45, Available at SSRN: https://ssrn.com/abstract=2459533 or http://dx.doi.org/10.2139/ssrn.2459533

Marcela Valenzuela

Pontificia Universidad Católica de Chile ( email )

Vicuña Mackenna 4860
Santiago, R. Metropolitana 7520421
Chile

Ilknur Zer (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Piotr Fryzlewicz

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

Thorsten Rheinlander

Vienna University of Technology ( email )

Karlsplatz 13
Vienna
Austria

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
94
Abstract Views
1,079
rank
339,773
PlumX Metrics