Marcela Valenzuela, Ilknur Zer, Piotr Fryzlewicz, and Thorsten Rheinlander
Abstract: The main contribution of this paper is to identify the strong predictive power of the relative concentration of depth provision, rather than volume of orders, over volatility. To this end, we propose a new measure, relative liquidity (RLIQ), which extracts information from a limit order book distribution 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.
Keywords: Order-driven markets, limit order book distribution, volatility predictability, liquidityFull paper (375 KB PDF)