Volatility and Depth in Commodity and FX Futures Markets

Prior theory suggests a positive relation between volatility and market depth, while past empirical research finds contrasting results. This paper examines the relation between the volatility and the limit order book depth in commodity and foreign exchange futures markets during a turbulent time using the generalized method of moments (GMM). Results indicate a negative relation between volatility and depth and suggest that the depth in the limit order book decreases as volatility increases. Findings help to understand how market participants provide liquidity in response to shifts in prices.

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The Relation between Intraday Limit Order Book Depth and Spread

International Journal of Financial Studies ◽

10.3390/ijfs9040060 ◽

2021 ◽

Vol 9 (4) ◽

pp. 60

Author(s):

Alexandre Aidov ◽

Olesya Lobanova

Keyword(s):

Generalized Method Of Moments ◽

Limit Order Book ◽

Order Book ◽

Inverse Relation ◽

Limit Order ◽

Market Participants ◽

Market Depth ◽

Bid Ask Spread ◽

Explanatory Factors ◽

Trading Decisions

Prior studies that examine the relation between market depth and bid–ask spread are often limited to the first level of the limit order book. However, the full limit order book provides important information beyond the first level about the depth and spread, which affects the trading decisions of market participants. This paper examines the intraday behavior of depth and spread in the five-deep limit order book and the relation between depth and spread in a futures market setting. A dummy-variables regression framework is employed and is estimated using the generalized method of moments (GMM). Results indicate an inverse U-shaped pattern for depth and an increasing pattern for spread. After controlling for known explanatory factors, an inverse relation between the limit order book depth and spread is documented. The inverse relation holds for depth and spread at individual levels in the limit order book as well. Results indicate that market participants actively manage both the price (spread) and quantity (depth) dimensions of liquidity along the five-deep limit order book.

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Limit Order Book (LOB) shape modeling in presence of heterogeneously informed market participants

Market Microstructure and Liquidity ◽

10.1142/s2382626620500070 ◽

2021 ◽

Author(s):

Mouhamad Drame

Keyword(s):

Limit Order Book ◽

Shape Modeling ◽

Order Book ◽

Limit Order ◽

Market Participants

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Optimal inventory management and order book modeling

ESAIM Proceedings and Surveys ◽

10.1051/proc/201965145 ◽

2019 ◽

Vol 65 ◽

pp. 145-181 ◽

Cited By ~ 1

Author(s):

Nicolas Baradel ◽

Bruno Bouchard ◽

David Evangelista ◽

Othmane Mounjid

Keyword(s):

Inventory Management ◽

High Frequency ◽

Limit Order Book ◽

Order Book ◽

Value Functions ◽

Limit Order ◽

Terminal Wealth ◽

Market Makers ◽

Market Participants ◽

The One

We model the behavior of three agent classes acting dynamically in a limit order book of a financial asset. Namely, we consider market makers (MM), high-frequency trading (HFT) firms, and institutional brokers (IB). Given a prior dynamic of the order book, similar to the one considered in the Queue-Reactive models [12, 18, 19], the MM and the HFT define their trading strategy by optimizing the expected utility of terminal wealth, while the IB has a prescheduled task to sell or buy many shares of the considered asset. We derive the variational partial differential equations that characterize the value functions of the MM and HFT and explain how almost optimal control can be deduced from them. We then provide a first illustration of the interactions that can take place between these different market participants by simulating the dynamic of an order book in which each of them plays his own (optimal) strategy.

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