Commonalities in the Order Book

Financial Markets and Portfolio Management, Vol. 23, No. 3, pp. 209-242, 2009

Posted: 20 Jun 2010

See all articles by Helena M. Beltran-Lopez

Helena M. Beltran-Lopez

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Pierre Giot

Facultés Universitaires Notre-Dame de la Paix (FUNDP)

Joachim Grammig

University of Tübingen

Multiple version iconThere are 2 versions of this paper

Date Written: July 18, 2009

Abstract

This paper uses data from one of the most important European stock markets and shows that, in line with predictions from theoretical market microstructure, a small number of latent factors captures most of the variation in stock specific order books. We show that these order book commonalities are much stronger than liquidity commonality across stocks. The result that bid and ask side as well as the visible and hidden parts of the order book exhibit quite specific dynamics is interpreted as evidence that open order book markets attract a heterogeneous trader population in terms of asset valuations and impatience. Quantifying the informational content of the extracted factors with respect to the evolution of the asset price, we find that the factor information shares are highest (about 10%) for less frequently traded stocks. We also show that the informational content of hidden orders is limited.

Keywords: Limit order book, Commonalities, Liquidity, Market microstructure

JEL Classification: G10, C32

Suggested Citation

Beltran-Lopez, Helena M. and Giot, Pierre and Grammig, Joachim, Commonalities in the Order Book (July 18, 2009). Financial Markets and Portfolio Management, Vol. 23, No. 3, pp. 209-242, 2009, Available at SSRN: https://ssrn.com/abstract=1626329

Helena M. Beltran-Lopez

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

Pierre Giot (Contact Author)

Facultés Universitaires Notre-Dame de la Paix (FUNDP) ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

Joachim Grammig

University of Tübingen ( email )

Mohlstrasse 36
72074 Tübingen, Baden Wuerttemberg 72074
Germany

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