The market impact of a limit order

Nikolaus Hautsch and Ruihong Huang

No 2009-051, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Despite their importance in modern electronic trading, virtually no systematic empirical evidence on the market impact of incoming orders is existing. We quantify the short-run and long-run price effect of posting a limit order by proposing a high-frequency cointegrated VAR model for ask and bid quotes and several levels of order book depth. Price impacts are estimated by means of appropriate impulse response functions. Analyzing order book data of 30 stocks traded at Euronext Amsterdam, we show that limit orders have significant market impacts and cause a dynamic (and typically asymmetric) rebalancing of the book. The strength and direction of quote and spread responses depend on the incoming orders' aggressiveness, their size and the state of the book. We show that the effects are qualitatively quite stable across the market. Cross-sectional variations in the magnitudes of price impacts are well explained by the underlying trading frequency and relative tick size.

Keywords: price impact; limit order; impulse response function; cointegration (search for similar items in EconPapers)
JEL-codes: C32 G14 G17 (search for similar items in EconPapers)
Date: 2009
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Related works:
Journal Article: The market impact of a limit order (2012)
Working Paper: The market impact of a limit order (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2009-051

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