An Empirical Analysis of the Shanghai and Shenzhen Limit Order Books
18 Pages Posted: 10 May 2012 Last revised: 20 Oct 2012
Date Written: October 19, 2012
Abstract
This paper investigates the market microstructure of the Shanghai and Shenzhen Stock Exchanges. The two major Chinese stock markets are pure order-driven trading mechanisms without market makers, and we analyze empirically both limit order books. We begin our empirical modeling using the vector autoregressive model of Hasbrouck and extend the model to incorporate other information in the limit order book. We also study the market impact on A shares, B shares and H shares, and analyze how the market impact of stocks varies cross sectionally with market capitalization, tick frequencies, and turnover. Furthermore, we find that market impact is increasing in trade size. Order imbalances predict the next day's returns, with small order imbalances having a negative effect.
Keywords: limit order book, Chinese stock market, microstructure, VAR model
JEL Classification: G14
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