Regime Identification in Limit Order Books
AbstractThis article develops and implements a new methodology for identifying intraday information regimes in limit order books. Based on Lehmann (2008), in an information regime all the information is trade related and arrives via order ?ow and, the fundamental value that underlines the prices does not change, it is simply translated by the size of the executed market order and the back?lling adjustment. During an information regime the best quotes and the underlying values follow a path de?ned by the limit order book. A change of information regime within a given day is shown to alter the provision of liquidity to the market with consequences for asset prices, trading behavior, and optimal trading strategies. By applying wavelet theory we have developed a methodology that allowed us to clearly identify information regimes. Our results show that information regimes have an impact on price formation and price discovery, including dynamic issues such as the process by which prices come to capture information over time. The discovery and ideate?cation of information regimes essentially uncovers the mechanism by which latent demands are translated into realized prices and volumes. These results empirically support Lehmann’s theoretical model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2012_04.
Date of creation: 2012
Date of revision:
Market microstructure; Information regimes; Limit order books; Wavelets; Wavelet multi-resolution analysis;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruce Lehmann, 2008. "Arbitrage-free Limit Order Books and the Pricing of Order Flow Risk," NBER Working Papers 13848, National Bureau of Economic Research, Inc.
- Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fordham Economics).
If references are entirely missing, you can add them using this form.