Information Content of the Limit Order Book for Crude Oil Futures Price Volatility

Abstract

This paper investigates the information content of the limit order book on future volatility in the crude oil futures market. We propose a time-weighted limit order book slope that incorporates the duration of each bid and ask update. When volatility is expected to increase around weekly announcements on physical crude oil inventory, we observe that the limit order book slope decreases significantly. We also show that the time-weighted limit order book slope is informative about price volatility one day ahead. Overall, our findings illustrate the importance of the limit order book as a conduit for volatility information.

Keywords: Crude oil futures; Energy market information releases; Futures price volatility; Time-weighted limit order book slope

JEL Classification: C35, G15, G25, G29