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Does the open limit order book matter in explaining long run volatility ?

Roberto Pascual and David Veredas ()

No 2006110, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper evaluates the informational content of an open limit order book by studying its role in explaining long run volatility. We separate liquidity-driven (transitory) volatility from information-driven (long run) volatility using a dynamic state-space co-integration model for ask and bid quotes. We report that changes in immediacy costs precede posterior fluctuations in long run volatility even after controlling for the incoming order flow. The book is less informative for large-caps than for small-caps. Consistently with previous studies, the book beyond the best quotes adds explanatory power to the best quotes. Finally, the explanatory power of the book decreases with the time resolution of the analysis.

Keywords: limit order book; volatility; electronic order-driven markets; state-sapce models; price formation; market microstructure (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2006-12
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Related works:
Working Paper: Does the open limit order book matter in explaining long run volatility? (2010)
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