Relative liquidity and future volatility

Marcela Valenzuela, Ilknur Zer, Piotr Fryzlewicz and Thorsten Rheinlander

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The main contribution of this paper is to identify the strong predictive power of the relative, rather than the absolute, volume of orders over volatility. To this end, we propose a new measure, relative liquidity, which accounts for how quoted depth is distributed in a limit order book and captures the level of consensus on a security's trading price. Higher liquidity provision farther away from the best quotes, relative to the rest of the book, is associated with a disagreement on the current price and followed by high volatility. The relationship is robust to the inclusion of several alternative measures.

Keywords: Order-driven markets; limit order book distribution; volatility predictability; liquidity (search for similar items in EconPapers)
JEL-codes: G1 G20 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published in Journal of Financial Markets, 2015, 24, pp. 25-48. ISSN: 1386-4181

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:62181

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