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The information Content of a Limit Order Book:the Case of an FX Market

  • : Roman Kozhan
  • Mark Salmon

In this paper we examine the question of whether knowledge of the information contained in a limit order book helps to provide economic value in a simple trading scheme. Given the greater information content of the order book, over simple price information, it might naturally be expected that the order book would dominate. Using Dollar Sterling tick data, we find that despite the in-sample statistical significance of variables describing the structure of the limit order book in explaining tick-by-tick returns, they do not consistently add significant economic value out-of-sample. We show this using a simple linear model to determine trading activity, as well as a model-free genetic algorithm based on price, order flow, and order book information. We also find that the profitability of all trading rules based on genetic algorithms dropped substantially in 2008 compared to 2003 data.

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Paper provided by Warwick Business School, Finance Group in its series Working Papers with number wpn10-05.

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Date of creation: 2010
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Handle: RePEc:wbs:wpaper:wpn10-05
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