Does the Open Limit Order Book Matter in Explaining Informational Volatility?
Pascual, Roberto
Pascual, Roberto
Publication Type
Journal article with impact factor
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Supervisor
Publication Year
2010-01-01
Journal
Journal of Financial Econometrics
Book
Publication Volume
8
Publication Issue
1
Publication Begin page
57
Publication End page
87
Publication Number of pages
Collections
Abstract
We evaluate the informational content of the open limit order book by studying its role in explaining the volatility of the efficient price. We separate transitory (liquidity-driven) volatility from informational (efficient price-related) volatility using a dynamic state-space co-integration model for ask and bid quotes. Consistently with Foucault, Moinas, and Theissen (2007, Review of Financial Studies), we show that for any given trade size, the higher the round-trip costs, the higher the ex post informational volatility. Other pieces of the LOB, such as quoted depth, both at and away from the best quotes, and the book imbalance, are also informative.
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Keywords
38 Economics, 3502 Banking, Finance and Investment, 3801 Applied Economics, 35 Commerce, Management, Tourism and Services