Testing the Effect of Technical Analysis on Market Quality and Order Book Dynamics
Applied Economics, Volume 51, 2019 - Issue 18, 1947-1976.
36 Pages Posted: 21 Jan 2021
Date Written: June 27, 2018
We find empirical support for the theoretical finding in agent-based models of limit order book markets that the effect of technical trading on market quality is not positive. When signals occur, technical traders lower liquidity as proxied by the relative spread, the effective spread, the realized spread, the dispersion and the slope in the order book. Technical trading is also found to be accompanied by rising volatility. There is overall strong empirical support against the hypothesis that technical trading has no effect on order book dynamics.
Keywords: Agent-based model, Liquidity, Technical Analysis, Limit Order Market
JEL Classification: G14, D82, C5
Suggested Citation: Suggested Citation