The dynamics of ex-ante weighted spread: an empirical analysis

Georges Dionne () and Xiaozhou Zhou

Quantitative Finance, 2020, vol. 20, issue 4, 593-617

Abstract: We model the evolution of the ex-ante weighted spread (EWS) embedded in an open Limit Order Book (LOB) and investigate the impact of observed market-related variables on the spread. Our modeling involves decomposing the joint distribution of the weighted spread into simple and interpretable distributions. Our main results have several implications: (i) EWS features high persistence in autocorrelation; (ii) lower-level LOB remains liquid even after a high trade imbalance; (iii) lower- and higher-level LOB react to temporal spread change and trade imbalance in different ways; and (iv) both trade durations and quote durations have seasonality effects. We also show, through a simple high frequency trading exercise, that the use of the model can be economically important. Further, our model provides an estimation of market resilience.

Date: 2020
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Working Paper: The Dynamics of Ex-ante Weighted Spread: An Empirical Analysis (2019)
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DOI: 10.1080/14697688.2019.1690160

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