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Does the open limit order book matter in explaining long run volatility?

  • Roberto Pascual
  • David Veredas

This paper evaluates the informational content of an open limit order book by studying its role in explaining long run volatility. We separate liquidity-driven (transitory) volatility from information-driven (long run) volatility using a dynamic state-space co-integration model for ask and bid quotes. We report that changes in immediacy costs precede posterior fluctuations in long run volatility even after controlling for the incoming order flow. The book is less informative for large-caps than for small-caps. Consistently with previous studies, the book beyond the best quotes adds explanatory power to the best quotes. Finally, the explanatory power of the book decreases with the time resolution of the analysis.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/136192.

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Date of creation: 2010
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Publication status: Published in: Journal of financial econometrics (2010) v.8 n° 1,p.57-87
Handle: RePEc:ulb:ulbeco:2013/136192
Contact details of provider: Postal: CP135, 50, avenue F.D. Roosevelt, 1050 Bruxelles
Web page: http://difusion.ulb.ac.be

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