Order Book Characteristics and the Volume-Volatility Relation: Empirical Evidence from a Limit Order Market

55 Pages Posted: 19 Jul 2004

See all articles by Randi Naes

Randi Naes

Norwegian Ministry of Trade and Industry

Johannes Atle Skjeltorp

Central Bank of Norway

Date Written: March 15, 2004

Abstract

We examine empirically the relationship between the demand and supply schedules in a limit order book and the volume volatility relation. Several empirical studies find support for the hypothesis that the volume-volatility relation is driven by the arrival rate of new information, proxied by the number of transactions. Our results show that the number of trades and the price volatility are also related to the slope of the order book. One possible interpretation for this finding is that the slope of the book is proxying for dispersed beliefs among investors. If so, this would support models where investor heterogeneity intensifies the volume-volatility relation.

Keywords: Market microstructure, equity trading, asymmetric information

JEL Classification: G10, G20

Suggested Citation

Naes, Randi and Skjeltorp, Johannes Atle, Order Book Characteristics and the Volume-Volatility Relation: Empirical Evidence from a Limit Order Market (March 15, 2004). Available at SSRN: https://ssrn.com/abstract=565323 or http://dx.doi.org/10.2139/ssrn.565323

Randi Naes

Norwegian Ministry of Trade and Industry ( email )

P.O. Box 8014 Dep
N-0030 Oslo
Norway
+47 22 24 04 34 (Phone)
+47 22 42 40 62 (Fax)

Johannes Atle Skjeltorp (Contact Author)

Central Bank of Norway ( email )

P.O. Box 1179
Oslo, N-0107
Norway

HOME PAGE: http://www.norges-bank.no/research/skjeltorp/

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