Order book characteristics and the volume-volatility relation: Empirical evidence from a limit order market [An article from: Journal of Financial Markets]

This digital document is a journal article from Journal of Financial Markets, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
Using unique data, we address the issue of price formation in a limit order market. A standard volume-volatility relation is documented with the number of trades acting as the important component of volume. The main contribution of the paper is to identify strong evidence that volume, volatility, and the volume-volatility relation are negatively related to the order book slope. These results are robust to the inclusion of several liquidity measures. A significant empirical relationship between the order book slope and the coefficient of variation in earnings forecasts by financial analysts suggests that the slope is proxying for disagreement among investors. Hence, our results support models where investor heterogeneity intensifies the volume-volatility relation.