An Empirical Investigation of the Option Value of the Limit Order Book on the Australian Stock Exchange

48 Pages Posted: 7 Dec 1997

See all articles by Elvis Jarnecic

Elvis Jarnecic

The University of Sydney; Financial Research Network (FIRN)

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Date Written: October 22, 1997

Abstract

There have been a number of investigations of the individual characteristics of the limit order book (Lee, Mucklow, and Ready, 1993; Harris, 1994; Bruno, Hillion, and Spatt, 1995). Lee, Mucklow, and Ready report that wide spreads are accompanied by low depths and that spreads widen and depths fall in response to higher volume. Harris (1994) however suggests a positive relationship between spreads and depth during normal trading periods. Based on the approach of Copeland and Galai (1983) and Brenner and Subrahmanyam (1988), we calculate the option value of the limit order book for four snapshots each day (11:00, 12:00, 14:30, and 15:58) for thirty firms listed on the Australian Stock Exchange. This approach enables us to consider the spread and depth of the limit order book simultaneously. We find that the option value of the limit order book is stable from day to day with changes in value due to changes in spreads offsetting those due to changes in depth. We find that the option value of the limit order book is lowest at 11:00 when the relatively higher bid/offer sizes do not offset the wider spreads. The option value of the limit order book increases throughout the trading day and almost 80% of the option value of the limit order book is concentrated at the best bid and ask.

JEL Classification: G13

Suggested Citation

Jarnecic, Elvis and McInish, Thomas H., An Empirical Investigation of the Option Value of the Limit Order Book on the Australian Stock Exchange (October 22, 1997). Available at SSRN: https://ssrn.com/abstract=45366 or http://dx.doi.org/10.2139/ssrn.45366

Elvis Jarnecic (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
620
Abstract Views
2,705
rank
42,796
PlumX Metrics