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Relative liquidity and future volatility

Valenzuela, Marcela, Zer, Ilknur, Fryzlewicz, Piotr and Rheinlander, Thorsten (2015) Relative liquidity and future volatility. Journal of Financial Markets, 24. pp. 25-48. ISSN 1386-4181

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Identification Number: 10.1016/j.finmar.2015.03.001

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.

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/13864...
Additional Information: © 2015 The Authors
Divisions: Statistics
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Sets: Departments > Statistics
Date Deposited: 04 Jun 2015 15:04
Last Modified: 20 Mar 2019 02:41
Projects: Fondecyt project no. 11140541, Instituto Milenio ICMIS130002
Funders: Fondecyt, Instituto Milenio
URI: http://eprints.lse.ac.uk/id/eprint/62181

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