The Relation between Intraday Limit Order Book Depth and Spread

Alexandre Aidov and Olesya Lobanova
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Alexandre Aidov: College of Business, University of Houston-Victoria, Victoria, TX 77901, USA
Olesya Lobanova: College of Business, University of Houston-Victoria, Victoria, TX 77901, USA

IJFS, 2021, vol. 9, issue 4, 1-13

Abstract: Prior studies that examine the relation between market depth and bid–ask spread are often limited to the first level of the limit order book. However, the full limit order book provides important information beyond the first level about the depth and spread, which affects the trading decisions of market participants. This paper examines the intraday behavior of depth and spread in the five-deep limit order book and the relation between depth and spread in a futures market setting. A dummy-variables regression framework is employed and is estimated using the generalized method of moments (GMM). Results indicate an inverse U-shaped pattern for depth and an increasing pattern for spread. After controlling for known explanatory factors, an inverse relation between the limit order book depth and spread is documented. The inverse relation holds for depth and spread at individual levels in the limit order book as well. Results indicate that market participants actively manage both the price (spread) and quantity (depth) dimensions of liquidity along the five-deep limit order book.

Keywords: market depth; bid–ask spread; limit order book; futures market (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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