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Relative liquidity and future volatility

Author

Listed:
  • Valenzuela, Marcela
  • Zer, Ilknur
  • Fryzlewicz, Piotr
  • Rheinlander, 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 & Rheinlander, Thorsten, 2015. "Relative liquidity and future volatility," LSE Research Online Documents on Economics 62181, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:62181
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    File URL: http://eprints.lse.ac.uk/62181/
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    References listed on IDEAS

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    5. PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," CORE Discussion Papers 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    Cited by:

    1. repec:eee:intfin:v:53:y:2018:i:c:p:179-199 is not listed on IDEAS
    2. Lee, Jaeram & Lee, Geul & Ryu, Doojin, 2018. "Difference in the intraday return-volume relationships of spots and futures: A quantile regression approach," Economics Discussion Papers 2018-68, Kiel Institute for the World Economy (IfW).
    3. Ahmed, Walid M.A., 2017. "The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience," Research in International Business and Finance, Elsevier, vol. 40(C), pages 61-77.

    More about this item

    Keywords

    Order-driven markets; limit order book distribution; volatility predictability; liquidity;

    JEL classification:

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

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