IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789812707291_0004.html
   My bibliography  Save this book chapter

The Option Value of the Limit Order Book

In: Advances In Quantitative Analysis Of Finance And Accounting Essays in Microstructure in Honor of David K Whitcomb

Author

Listed:
  • Alex Frino

    (University of Sydney, Australia)

  • Elvis Jarnecic

    (University of Sydney, Australia)

  • Thomas H. McInish

    (The University of Memphis, USA)

Abstract

Previous studies of the limit order book report that low depths accompany wide spreads and that spreads widen and depths fall in response to higher volume, but some postulate a positive relationship between spreads and depth during normal trading periods. We calculate the option value of the limit order book at 11:00 a.m. for 10 actively traded firms listed on the Australian Stock Exchange. Simultaneously this approach enables us to consider the spread and depth of the limit order book. We find that 33.1% of the option value of the limit order book is provided at the best ask and 34.7% at the best bid. We find that the option value of the limit order book is greatest at the best bid price and the best ask price and is more stable through time than the option value of individual shares or share quantities in the book. Also, consistent with the arguments of Cohen et al. (1981), we find evidence of equilibrium in the supply and demand of liquidity.

Suggested Citation

  • Alex Frino & Elvis Jarnecic & Thomas H. McInish, 2006. "The Option Value of the Limit Order Book," World Scientific Book Chapters, in: Ivan E Brick & Tavy Ronen & Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting Essays in Microstructure in Honor of David K Whitcomb, chapter 4, pages 57-71, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812707291_0004
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789812707291_0004
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789812707291_0004
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789812707291_0004. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.