An Empirical Analysis of the Shanghai and Shenzhen Limit Order Books

18 Pages Posted: 10 May 2012 Last revised: 20 Oct 2012

See all articles by Huimin Chung

Huimin Chung

National Chiao-Tung University - Graduate Institute of Finance

Cheng Gao

Rutgers University, Department of Economics

Jie Lu

Rutgers, The State University of New Jersey - New Brunswick/Piscataway

Bruce Mizrach

Rutgers University, Department of Economics

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

Suggested Citation

Chung, Huimin and Gao, Cheng and Lu, Jie and Mizrach, Bruce, An Empirical Analysis of the Shanghai and Shenzhen Limit Order Books (October 19, 2012). Available at SSRN: https://ssrn.com/abstract=2055179 or http://dx.doi.org/10.2139/ssrn.2055179

Huimin Chung

National Chiao-Tung University - Graduate Institute of Finance ( email )

Hsinchu 300
Taiwan

Cheng Gao

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Jie Lu

Rutgers, The State University of New Jersey - New Brunswick/Piscataway ( email )

94 Rockafeller Road
New Brunswick, NJ 08901
United States

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

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