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Asymmetric Effects of the Limit Order Book on Price Dynamics

Tolga Cenesizoglu (), Georges Dionne and Xiaozhou Zhou ()
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Tolga Cenesizoglu: Department of Finance, Postal: HEC Montreal, 3000, Chemin Cote-Ste-Catherine, room 4.259, Montreal (Qc) Canada, H3T 2A7,
Xiaozhou Zhou: Université du Québec à Montréal, Postal: Finance Department, Université du Québec à Montréal, 315, Sainte-Catherine St East, room R-2330, Montréal (Qc) Canada, H2X 3X2, ,,

No 16-5, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We analyze whether the information in different parts of the limit order book affect prices differently. We distinguish between slopes of lower and higher levels of the bid and ask sides and include these four slope measures as well as midquote return and trade direction in a vector autoregressive model. Slope measures of the same side based on different levels affect both short- and long-run price dynamics quite differently, in line with the predictions based on recent theoretical models such as Foucault, Kadan, and Kandel (2005) and Rosu (2009). In a high frequency day trading exercise, we show that ignoring these asymmetries costs a trader approximately 25 basis points in daily profits, suggesting that the asymmetries are important not only statistically but also economically. Our statistical results are robust to using alternative definitions of slope measures and sample periods while our economic results are robust to trading under alternative assumptions such as trading slower speeds.

Keywords: Ultra-high frequency data; Hasbrouck model; Limit order book slope; High-frequency trading; Asymmetric Effect. (search for similar items in EconPapers)
JEL-codes: G10 G14 G19 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2016-12-05
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Handle: RePEc:ris:crcrmw:2016_005