Information Content of Limit Order Book in Tehran Stock Exchange

Subject Areas : Journal of Investment Knowledge

Ahmad  Badri ¹ (دانشیار و عضو هیئت علمی دانشگاه شهید بهشتی)
Mohammad  Arab Mazar ² (دانشیار و عضو هیئت علمی دانشگاه شهید بهشتی)
Massoud  Soltanzali ³ (دانشجوی دکتری مدیریت مالی دانشگاه شهید بهشتی)

Received: 2015-10-28 Accepted : 2016-01-19 Published : 2016-06-21

Keywords: limit order book, Information Content, price discovery, information share, High Frequency Data,

Abstract :

Using high frequency data from 33 member companies of the TEFIX30 (about 5 million data), this study examined the information content of limit order book in Tehran Stock Exchange. We try to find that does limit orders behind the best bid and offer provide useful information about stock value? And how much is their information share? We use two well-known methods based on a vector error correction model. Results show that based on Hasbrouck (Gonzalo-Granger) measure, contribution of steps 2 to 10 to price discovery is about 18% (25%) and also contribution of steps 4 to 10 that are not publicly visible is about 8% (10%).

References:

*    Baillie, Richard T., G. Geoffrey Booth, Yiuman Tse, and Tatyana Zabotina. "Price discovery and common factor models." Journal of Financial Markets 5, no. 3 (2002): 309-321.

*    Baruch, Shmuel. "Who Benefits from an Open Limit‐Order Book?*." The Journal of Business 78, no. 4 (2005): 1267-1306.

*   Biais, Bruno, Pierre Hillion, and Chester Spatt. "An empirical analysis of the limit order book and the order flow in the Paris Bourse." the Journal of Finance 50, no. 5 (1995): 1655-1689.

*   Bloomfield, Robert, Maureen O’hara, and Gideon Saar. "The “make or take” decision in an electronic market: Evidence on the evolution of liquidity." Journal of Financial Economics 75, no. 1 (2005): 165-199.

*   Boehmer, Ekkehart, Gideon Saar, and Lei Yu. "Lifting the veil: An analysis of Pre‐trade transparency at the NYSE." The Journal of Finance 60, no. 2 (2005): 783-815.

*   Booth, G. Geoffrey, Ji‐Chai Lin, Teppo Martikainen, and Yiuman Tse. "Trading and pricing in upstairs and downstairs stock markets." Review of Financial Studies 15, no. 4 (2002): 1111-1135.

*   Cao, Charles, Oliver Hansch, and Xiaoxin Wang Beardsley. "The informational content of an open limit order book." In AFA 2005 Philadelphia Meetings. 2004.

*   Cao, Charles, Oliver Hansch, and Xiaoxin Wang. "The information content of an open limit‐order book." Journal of futures markets 29, no. 1 (2009): 16-41.

*   Dufour, Alfonso, and Satchit Sagade. "The Shape and Information Content of a Post-MiFID Limit Order Book." Available at SSRN 2232700 (2013).

*  Eun, Cheol S., and Sanjiv Sabherwal. "Forecasting exchange rates: Do banks know better?." Global Finance Journal 13, no. 2 (2002): 195-215.

*   Foucault, Thierry. "Order flow composition and trading costs in a dynamic limit order market." Journal of Financial markets 2, no. 2 (1999): 99-134.

*   Glosten, Lawrence R. "Is the electronic open limit order book inevitable?." The Journal of Finance 49, no. 4 (1994): 1127-1161.

*   Gonzalo, Jesus, and Clive Granger. "Estimation of common long-memory components in cointegrated systems." Journal of Business & Economic Statistics 13, no. 1 (1995): 27-35.

*  Griffiths, Mark D., Brian F. Smith, D. Alasdair S. Turnbull, and Robert W. White. "The costs and determinants of order aggressiveness." Journal of Financial Economics 56, no. 1 (2000): 65-88.

*   Handa, Puneet, and Robert A. Schwartz. "Limit order trading." The Journal of Finance 51, no. 5 (1996): 1835-1861.

*   Harris, Lawrence, and Joel Hasbrouck. "Market vs. limit orders: the SuperDOT evidence on order submission strategy." Journal of Financial and Quantitative analysis 31, no. 02 (1996): 213-231.

*    Harris, Lawrence E., and Venkatesh Panchapagesan. "The information content of the limit order book: evidence from NYSE specialist trading decisions." Journal of Financial Markets 8, no. 1 (2005): 25-67.

*  Hasbrouck, Joel. "One security, many markets: Determining the contributions to price discovery." The journal of Finance 50, no. 4 (1995): 1175-1199.

*  Huang, Roger D. "The quality of ECN and Nasdaq market maker quotes." The Journal of Finance 57, no. 3 (2002): 1285-1319.

*       Kaniel, Ron, and Hong Liu. "So What Orders Do Informed Traders Use?." The Journal of Business 79, no. 4 (2006): 1867-1913.

*       Latza, Torben, and Richard Payne. "Measuring the information content of limit order flows." Unpublished manuscript (2010).

*       Lehmann, Bruce N. "Some desiderata for the measurement of price discovery across markets." Journal of Financial Markets 5, no. 3 (2002): 259-276.

*       Madhavan, Ananth, David Porter, and Daniel Weaver. "Should securities markets be transparent?." Journal of Financial Markets 8, no. 3 (2005): 265-287.

*       Parlour, Christine A. "Price dynamics in limit order markets." Review of Financial Studies 11, no. 4 (1998): 789-816.

*       Ranaldo, Angelo. "Order aggressiveness in limit order book markets." Journal of Financial Markets 7, no. 1 (2004): 53-74.

*       Seppi, Duane J. "Liquidity provision with limit orders and a strategic specialist." Review of Financial Studies 10, no. 1 (1997): 103-150.

Yan, Bingcheng, and Eric Zivot. "A structural analysis of price discovery measures." Journal of Financial Markets 13, no. 1 (2010): 1-19.