The market impact of a limit order

Arbeitspapier

Despite their importance in modern electronic trading, virtually no systematic empirical evidence on the market impact of incoming orders is existing. We quantify the short-run and long-run price effect of posting a limit order by proposing a high-frequency cointegrated VAR model for ask and bid quotes and several levels of order book depth. Price impacts are estimated by means of appropriate impulse response functions. Analyzing order book data of 30 stocks traded at Euronext Amsterdam, we show that limit orders have significant market impacts and cause a dynamic (and typically asymmetric) rebalancing of the book. The strength and direction of quote and spread responses depend on the incoming orders' aggressiveness, their size and the state of the book. We show that the effects are qualitatively quite stable across the market. Cross-sectional variations in the magnitudes of price impacts are well explained by the underlying trading frequency and relative tick size.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper ; No. 2009/23

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Information and Market Efficiency; Event Studies; Insider Trading ; Financial Forecasting and Simulation
• Subject: Price Impact ; Limit Order ; Impulse Response Function ; Cointegration ; Wertpapierhandel ; Auftrag ; Börsenkurs ; Bid-Ask Spread ; Reaktionsfunktion ; Kointegration ; VAR-Modell ; Schätzung ; Niederlande

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hautsch, Nikolaus ; Huang, Ruihong
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/43229
• URN: urn:nbn:de:hebis:30-72720
• Last update: 10.03.2025, 11:43 AM CET