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Relative liquidity and future volatility

Author

Listed:
  • Valenzuela, Marcela
  • Zer, Ilknur
  • Fryzlewicz, Piotr
  • Rheinländer, Thorsten

Abstract

The main contribution of this paper is to identify the strong predictive power of the relative, rather than the absolute, volume of orders over volatility. To this end, we propose a new measure, relative liquidity, which accounts for how quoted depth is distributed in a limit order book and captures the level of consensus on a security׳s trading price. Higher liquidity provision farther away from the best quotes, relative to the rest of the book, is associated with a disagreement on the current price and followed by high volatility. The relationship is robust to the inclusion of several alternative measures.

Suggested Citation

  • Valenzuela, Marcela & Zer, Ilknur & Fryzlewicz, Piotr & Rheinländer, Thorsten, 2015. "Relative liquidity and future volatility," Journal of Financial Markets, Elsevier, vol. 24(C), pages 25-48.
    • Handle: RePEc:eee:finmar:v:24:y:2015:i:c:p:25-48
    DOI: 10.1016/j.finmar.2015.03.001
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    More about this item

    Keywords

    Order-driven markets; Limit order book distribution; Volatility predictability; Liquidity;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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