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Volatility and the role of order book structure

Author

Listed:
  • Ralf Becker

    (University Manchester)

  • Adam Clements

    (QUT)

Abstract

There is much literature that deals with modeling and forecasting asset return volatility. However, much of this research does not attempt to explain variations in the level of volatility. Movements in volatility are often linked to trading volume or frequency, as a reflection of underlying information flow. This paper considers whether the state of an open limit order book influences volatility. It is found that market depth and order imbalance do influence volatility, even in the presence of the traditional volume related variables.

Suggested Citation

  • Ralf Becker & Adam Clements, 2010. "Volatility and the role of order book structure," NCER Working Paper Series 64, National Centre for Econometric Research.
    • Handle: RePEc:qut:auncer:2010_11
    as

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    File URL: http://www.ncer.edu.au/papers/documents/WPNo64.pdf
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    References listed on IDEAS

    as
    1. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Oxford University Press, vol. 2(1), pages 1-37.
    2. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    3. Roberto Pascual & David Veredas, 2010. "Does the Open Limit Order Book Matter in Explaining Informational Volatility?," Journal of Financial Econometrics, Oxford University Press, vol. 8(1), pages 57-87, Winter.
    4. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Realized volatility; bi-power variation; limit order book; market microstructure; order imbalance;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

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