Asymmetric Effects of the Limit Order Book on Price Dynamics

48 Pages Posted: 2 Dec 2016 Last revised: 5 Dec 2016

See all articles by Tolga Cenesizoglu

Tolga Cenesizoglu

HEC Montreal - Department of Finance

Georges Dionne

HEC Montreal - Department of Finance

Xiaozhou Zhou

University of Quebec at Montreal (UQAM) - School of Management (ESG)

Date Written: December 5, 2016

Abstract

We analyze whether the information in different parts of the limit order book affect prices differently. We distinguish between slopes of lower and higher levels of the bid and ask sides and include these four slope measures as well as midquote return and trade direction in a vector autoregressive model. Slope measures of the same side based on different levels affect both short- and long-run price dynamics quite differently, in line with the predictions based on recent theoretical models such as Foucault, Kadan, and Kandel (2005) and Rosu (2009). In a high frequency day trading exercise, we show that ignoring these asymmetries costs a trader approximately 25 basis points in daily profits, suggesting that the asymmetries are important not only statistically but also economically. Our statistical results are robust to using alternative definitions of slope measures and sample periods while our economic results are robust to trading under alternative assumptions such as trading slower speeds.

Keywords: Ultra-high frequency data, Hasbrouck model, Limit order book slope, High-frequency trading, Asymmetric Effect

JEL Classification: G10, G14, G19

Suggested Citation

Cenesizoglu, Tolga and Dionne, Georges and Zhou, Xiaozhou, Asymmetric Effects of the Limit Order Book on Price Dynamics (December 5, 2016). Available at SSRN: https://ssrn.com/abstract=2878945 or http://dx.doi.org/10.2139/ssrn.2878945

Tolga Cenesizoglu

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.hec.ca/en/profs/tolga.cenesizoglu.html

Georges Dionne

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Xiaozhou Zhou (Contact Author)

University of Quebec at Montreal (UQAM) - School of Management (ESG) ( email )

315, rue Sainte-Catherine Est
Montreal, Quebec H2X 3X2
Canada
514 987 3000 ext 0999 (Phone)

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