In this paper, we study the determinants of order aggressiveness and traders' order submission strategy in an open limit order book market. Applying an order classification scheme, we model the most aggressive market orders, limit orders as well as cancellations on both sides of the market employing a sixdimensional autoregressive conditional intensity model. Using order book data from the Australian Stock Exchange, we find that market depth, the queued volume, the bid-ask spread, recent volatility, as well as recent changes in both the order flow and the price play an important role in explaining the determinants of order aggressiveness. Overall, our empirical results broadly confirm theoretical predictions on limit order book trading. However, we also find evidence for behavior that can be attributed to particular liquidity and volatility effects.
Keywords
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Al-Suhaibani M, Kryzanowski L 2000 An exploratory analysis of the order book, and order flow and execution on the Saudi stock market. J Bank Financ 24:1323-1357
Bauwens L, Giot P 2000 The logarithmic ACD model: an application to the Bid/Ask Quote Process of two NYSE stocks. Ann Econ Stat 60:117-149
Bauwens L, Hautsch N (2003) Dynamic Latent Factor Models for Intensity Processes, Discussion Paper 2003/103, CORE, Université Catholique de Louvain
Bauwens L, Veredas D 2004 The stochastic conditional duration model: a latent factor model for the analysis of financial durations. J Econom 119:381-412
Biais B, Hillion P, Spatt C 1995 An empirical analysis of the limit order book and the order flow in the Paris bourse. J Financ 50:1655-1689
Bisière C, Kamionka T 2000 Timing of orders, orders aggressiveness and the order book at the Paris bourse. Ann Econ Stat 60:43-72
Bowsher CG 2002 Modelling Security Markets in Continuous Time: Intensity based, Multivariate Point Process Models, Discussion Paper 2002-W22, Nuffield College, Oxford
Brémaud P 1981 Point processes and queues, martingale dynamics. Springer, Berlin Heidelberg New York
Cao C, Hansch O, Wang X (2003) The Informational Content of an Open Limit Order Book, Discussion paper, Pennsylvania State University
Cohen KJ, Maier SF, Schwartz RA, Whitcomb DK 1981 Transaction costs, order placement strategy, and existence of the bid-ask spread. J Polit Econ 89(2):287-305
Coppejans M, Domowitz I (2002) An Empirical Analysis of Trades, Orders, and Cancellations in a Limit Order Market, Discussion paper, Duke University
Dufour A, Engle RF (2000) The ACD Model: Predictability of the Time between Consecutive Trades, Discussion paper, ISMA Centre, University of Reading
Engle RF, Russell JR 1998 Autoregressive conditional duration: a new model for irregularly spaced transaction data. Econometrica 66:1127-1162
Fernandes M, Grammig J (2001) A Family of Autoregressive Conditional Duration Models, Discussion Paper 2001/31, CORE, Université Catholique de Louvain
Foucault T 1999 Order flow composition and trading costs in a dynamic limit order market. J Financ Mark 2:99-134
Glosten LR 1994 Is the electronic open limit order book inevitable. J Financ 49:1127-1161
Grammig J, Maurer K-O 2000 Non-monotonic hazard functions and the autoregressive conditional duration model. Econometrics J 3:16-38
Griffiths MD, Smith BF, Turnbull DAS, White RW 2000 The costs and determinants of order aggressiveness. J Financ Econ 56:65-88
Hall AD, Hautsch N (2004) A continuous-time measurement of the buy-sell pressure in a limit order book market, Discussion Paper 04-07, Institute of Economics, University of Copenhagen
Handa P, Schwartz RA 1996 Limit order trading. J Financ 51:1835-1861
Handa P, Schwartz RA, Tiwari A 2003 Quote setting and price formation in an order driven market. J Financ Mark 6:461-489
Harris L 1998 Optimal dynamic order submission strategies in some stylized trading problems. Financ Mark Inst Instrum 7:1-75
Harris L, Hasbrouck J 1996 Market vs. limit orders: The SuperDOT evidence on order submission strategy. J Financ Quant Anal 31(2):213-231
Hautsch N 2004 Modelling irregularly spaced financial data—theory and practice of dynamic duration models, vol. 539 of Lecture Notes in Economics and Mathematical Systems. Springer, Berlin Heidelberg New York
Hollifield B, Miller RA, Sandås P, Slive J 2002 Liquidity supply and demand in limit order markets, Discussion paper, Centre for Economic Policy Research, London
Lo I, Sapp SG (2003) Order submission: the choice between limit and market orders, Discussion paper, University of Waikato, University of Western Ontario
Lunde A (2000) A generalized gamma autoregressive conditional duration model, Discussion paper, Aarlborg University
Parlour CA 1998 Price dynamics and limit order markets. Rev Financ Stud 11:789-816
Pascual R, Veredas D (2004) What Pieces of Limit Order Book Information are Informative? Discussion Paper 2004/33, CORE, Université Catholique de Louvain
Ranaldo A 2004 Order aggressiveness in limit order book markets. J Financ Mark 7:53-74
Russell JR (1999) Econometric modeling of multivariate irregularly-spaced high-frequency data, Discussion paper, University of Chicago
Seppi DJ 1997 Liquidity provision with limit orders and strategic specialist. Rev Financ Stud 1 (1):103-150
Zhang MY, Russell JR, Tsay RS 2001 A nonlinear autoregressive conditional duration model with applications to financial transaction data. J Econom 104:179-207
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2008 Physica-Verlag Heidelberg
About this chapter
Cite this chapter
Hall, A.D., Hautsch, N. (2008). Order aggressiveness and order book dynamics. In: Bauwens, L., Pohlmeier, W., Veredas, D. (eds) High Frequency Financial Econometrics. Studies in Empirical Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-1992-2_7
Download citation
DOI: https://doi.org/10.1007/978-3-7908-1992-2_7
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-7908-1991-5
Online ISBN: 978-3-7908-1992-2
eBook Packages: Business and EconomicsEconomics and Finance (R0)