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Title:The market impact of a limit order PDF Logo
Authors:Hautsch, Nikolaus
Huang, Ruihong
Issue Date:2009
Series/Report no.:SFB 649 discussion paper 2009,051
Abstract: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.
Subjects:price impact
limit order
impulse response function
cointegration
JEL:G14
C32
G17
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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