Relative liquidity and future volatility

Marcela Valenzuela, Ilknur Zer, Piotr Fryzlewicz and Thorsten Rheinländer

Journal of Financial Markets, 2015, vol. 24, issue C, 25-48

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
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:24:y:2015:i:c:p:25-48

DOI: 10.1016/j.finmar.2015.03.001

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