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The market impact of a limit order

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  • Hautsch, Nikolaus
  • Huang, Ruihong

Abstract

Despite their importance in modern electronic trading, virtually no systematic empirical evidence on the market impact of incoming orders is existing. We quantify the short-run and long-run price effect of posting a limit order by proposing a high-frequency cointegrated VAR model for ask and bid quotes and several levels of order book depth. Price impacts are estimated by means of appropriate impulse response functions. Analyzing order book data of 30 stocks traded at Euronext Amsterdam, we show that limit orders have significant market impacts and cause a dynamic (and typically asymmetric) rebalancing of the book. The strength and direction of quote and spread responses depend on the incoming orders' aggressiveness, their size and the state of the book. We show that the effects are qualitatively quite stable across the market. Cross-sectional variations in the magnitudes of price impacts are well explained by the underlying trading frequency and relative tick size. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2009/23.

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Date of creation: 2009
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Handle: RePEc:zbw:cfswop:200923

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Keywords: Price Impact; Limit Order; Impulse Response Function; Cointegration;

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References

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  1. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  4. Ingrid Lo & Stephen G. Sapp, 2006. "A Structural Error-Correction Model of Best Prices and Depths in the Foreign Exchange Limit Order Market," Working Papers 06-8, Bank of Canada.
  5. Søren Johansen & Morten Ørregaard Nielsen, 2010. "Likelihood inference for a fractionally cointegrated vector autoregressive model," Working Papers 1237, Queen's University, Department of Economics.
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  7. Gredenhoff, Mikael & Jacobson, Tor, 2001. "Bootstrap Testing Linear Restrictions on Cointegrating Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 63-72, January.
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  13. Bloomfield, Robert & O'Hara, Maureen & Saar, Gideon, 2005. "The "make or take" decision in an electronic market: Evidence on the evolution of liquidity," Journal of Financial Economics, Elsevier, vol. 75(1), pages 165-199, January.
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  16. Nikolaus Hautsch & Ruihong Huang, 2011. "Limit Order Flow, Market Impact and Optimal Order Sizes: Evidence from NASDAQ TotalView-ITCH Data," SFB 649 Discussion Papers SFB649DP2011-056, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  17. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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  19. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
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  22. Wolfgang Karl Härdle & Nikolaus Hautsch & Andrija Mihoci, 2009. "Modelling and Forecasting Liquidity Supply Using Semiparametric Factor Dynamics," SFB 649 Discussion Papers SFB649DP2009-044, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  23. Lutkepohl, Helmut, 1990. "Asymptotic Distributions of Impulse Response Functions and Forecast Error Variance Decompositions of Vector Autoregressive Models," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 116-25, February.
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Citations

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Cited by:
  1. Gökhan Cebiroglu & Ulrich Horst, 2012. "Hidden Liquidity: Determinants and Impact," SFB 649 Discussion Papers SFB649DP2012-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Nikolaus Hautsch & Ruihong Huang, 2012. "On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements," SFB 649 Discussion Papers SFB649DP2012-014, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Xue, Yi & Gençay, Ramazan, 2012. "Hierarchical information and the rate of information diffusion," Journal of Economic Dynamics and Control, Elsevier, vol. 36(9), pages 1372-1401.
  4. Francesco Calvori & Fabrizio Cipollini & Giampiero M. Gallo, 2014. "Go with the Flow: A GAS model for Predicting Intra-daily Volume Shares," Econometrics Working Papers Archive 2014_01, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", revised Feb 2014.
  5. Hautsch, Nikolaus & Hess, Dieter E. & Veredas, David, 2010. "The impact of macroeconomic news on quote adjustments, noise, and informational volatility," CFS Working Paper Series 2010/01, Center for Financial Studies (CFS).
  6. Jose Blanchet & Xinyun Chen, 2013. "Continuous-time Modeling of Bid-Ask Spread and Price Dynamics in Limit Order Books," Papers 1310.1103, arXiv.org.
  7. repec:hal:wpaper:hal-00745317 is not listed on IDEAS
  8. Hautsch, Nikolaus & Podolskij, Mark, 2010. "Pre-averaging based estimation of quadratic variation in the presence of noise and jumps: Theory, implementation, and empirical evidence," CFS Working Paper Series 2010/17, Center for Financial Studies (CFS).
  9. Robert Engle & Michael Fleming & Eric Ghysels & Giang Nguyen, 2012. "Liquidity, volatility, and flights to safety in the U.S. treasury market: evidence from a new class of dynamic order book models," Staff Reports 590, Federal Reserve Bank of New York.
  10. Rama Cont & Arseniy Kukanov & Sasha Stoikov, 2010. "The Price Impact of Order Book Events," Papers 1011.6402, arXiv.org, revised Apr 2011.
  11. Fabrizio Pomponio & Frédéric Abergel, 2013. "Multiple-limit trades : empirical facts and application to lead-lag measures," Post-Print hal-00745317, HAL.
  12. Forsyth, P.A. & Kennedy, J.S. & Tse, S.T. & Windcliff, H., 2012. "Optimal trade execution: A mean quadratic variation approach," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1971-1991.

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