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Does the open limit order book matter in explaining informational volatility?

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  • Roberto Pascual
  • David Veredas

Abstract

We evaluate the informational content of the open limit order book by studying its role in explaining the volatility of the efficient price. We separate transitory (liquidity-driven) volatility from informational (efficient price-related) volatility using a dynamic state-space co-integration model for ask and bid quotes. Consistently with Foucault, Moinas, and Theissen (2007, Review of Financial Studies), we show that for any given trade size, the higher the roundtrip costs, the higher the ex post informational volatility. Other pieces of the LOB, such as quoted depth, both at and away from the best quotes, and the book imbalance, are also informative. © The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oupjournals.org.

Suggested Citation

  • Roberto Pascual & David Veredas, 2009. "Does the open limit order book matter in explaining informational volatility?," ULB Institutional Repository 2013/183777, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/183777
    Note: SCOPUS: ar.j
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    Cited by:

    1. Ralf Becker & Adam Clements, 2010. "Volatility and the role of order book structure," NCER Working Paper Series 64, National Centre for Econometric Research.
    2. 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.
    3. Peter Malec, 2016. "A Semiparametric Intraday GARCH Model," Cambridge Working Papers in Economics 1633, Faculty of Economics, University of Cambridge.
    4. Gregory Boadu-Sebbe, 2022. "Effect of Exchange-Traded Funds Arbitrage Transactions on their Underlying Holdings," CERGE-EI Working Papers wp738, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    5. Abad, David & Massot, Magdalena & Nawn, Samarpan & Pascual, Roberto & Yagüe, José, 2025. "Message traffic and short-term illiquidity in high-speed markets," Emerging Markets Review, Elsevier, vol. 65(C).
    6. Hautsch, Nikolaus & Hess, Dieter & Veredas, David, 2011. "The impact of macroeconomic news on quote adjustments, noise, and informational volatility," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2733-2746, October.
    7. Medina, Vicente & Pardo, Ángel & Pascual, Roberto, 2014. "The timeline of trading frictions in the European carbon market," Energy Economics, Elsevier, vol. 42(C), pages 378-394.
    8. Duong, Huu Nhan & Kalev, Petko S., 2014. "Anonymity and the Information Content of the Limit Order Book," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 30(C), pages 205-219.
    9. Gloria Gonzalez‐Rivera & Yun Luo & Esther Ruiz, 2020. "Prediction regions for interval‐valued time series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(4), pages 373-390, June.
    10. Abad, David & Pascual, Roberto, 2015. "The friction-free weighted price contribution," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 226-239.
    11. Roongkiat Ratanabanchuen & Kanis Saengchote & Voraprapa Nakavachara & Thitiphong Amonthumniyom & Pongsathon Parinyavuttichai & Polpatt Vinaibodee, 2024. "The test of investors' behavioral bias through the price discovery process in cryptoasset exchange" Transactional-level evidence from Thailand," Papers 2406.02878, arXiv.org.
    12. Pascual, Roberto & Pascual-Fuster, Bartolomé, 2014. "The relative contribution of ask and bid quotes to price discovery," Journal of Financial Markets, Elsevier, vol. 20(C), pages 129-150.
    13. Georges Dionne & Xiaozhou Zhou, 2020. "The dynamics of ex-ante weighted spread: an empirical analysis," Quantitative Finance, Taylor & Francis Journals, vol. 20(4), pages 593-617, April.
    14. Tian, Xiao & Duong, Huu Nhan & Kalev, Petko S., 2019. "Information content of the limit order book for crude oil futures price volatility," Energy Economics, Elsevier, vol. 81(C), pages 584-597.
    15. Rannou, Yves, 2017. "Liquidity, information, strategic trading in an electronic order book: New insights from the European carbon markets," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 779-808.
    16. Gloria Gonzalez-Rivera & Yun Luo & Esther Ruiz, 2018. "Prediction Regions for Interval-valued Time Series," Working Papers 201817, University of California at Riverside, Department of Economics.
    17. 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.
    18. Piotr Fryzlewicz & Thorsten Rheinlander & Marcela Valenzuela & Ilknur Zer, 2014. "Relative Liquidity and Future Volatility," Finance and Economics Discussion Series 2014-45, Board of Governors of the Federal Reserve System (U.S.).

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