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Title: Effects of the Limit Order Book on Price Dynamics
Authors: Cenesizoglu, Tolga
Dionne, Georges
Zhou, Xiaozhou
Keywords: High freqency limit order book
High frequency trading
High freqency transaction price
Asset price
Midquote return
High frequency return
Issue Date: 2014-11
Series/Report no.: Cahiers du CIRPÉE;14-26
Abstract: In this paper, we analyze whether the state of the limit order book affects future price movements in line with what recent theoretical models predict. We do this in a linear vector autoregressive system which includes midquote return, trade direction and variables that are theoretically motivated and capture different dimensions of the information embedded in the limit order book. We find that different measures of depth and slope of bid and ask sides as well as their ratios cause returns to change in the next transaction period in line with the predictions of Goettler, Parlour, and Rajan (2009) and Kalay and Wohl (2009). Limit order book variables also have significant long term cumulative effects on midquote return, which is stronger and takes longer to be fully realized for variables based on higher levels of the book. In a simple high frequency trading exercise, we show that it is possible in some cases to obtain economic gains from the statistical relation between limit order book variables and midquote return.
URI: https://depot.erudit.org/id/003996dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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