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The information content of a limit order book: The case of an FX market

Roman Kozhan () and Mark Salmon

Journal of Financial Markets, 2012, vol. 15, issue 1, 1-28

Abstract: In this paper we examine the question of whether knowledge of the information contained in a limit order book helps to provide economic value in a simple trading scheme. Given the greater information content of the order book, over simple price information, it might naturally be expected that the order book would dominate. Using Dollar Sterling tick data, we find that despite the in-sample statistical significance of variables describing the structure of the limit order book in explaining tick-by-tick returns, they do not consistently add significant economic value out-of-sample. We show this using a simple linear model to determine trading activity, as well as a model-free genetic algorithm based on price, order flow, and order book information. We also find that the profitability of all trading rules based on genetic algorithms dropped substantially in 2008 compared to 2003 data.

Keywords: Profitability; Limit order book; High-frequency data; Algorithmic trading (search for similar items in EconPapers)
JEL-codes: D81 F31 C53 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:15:y:2012:i:1:p:1-28

DOI: 10.1016/j.finmar.2011.07.002

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