Affiliations: [a] Graduate Department of Financial Engineering, Ajou University, Suwon, Korea | [b] Department of Mathematics, University of Louisville, Louisville, KY, USA
Address for correspondence: Kiseop Lee, Department of Mathematics, University of Louisville, Louisville, KY 40292, USA. Tel.: +1 502 852 6292; Fax: +1 502 852 7132; E-mail: [email protected].
Abstract: We test the effect of order book events at the best quotes on price changes under the model proposed by Cont et al., in: Journal of Financial Econometrics 12 (2014), 47–88. The OFI (Order Flow Imbalance) measure in the model explains the price change of the nearby month KOSPI 200 futures contract reasonably well, which is one of the most liquidly traded securities in the world. The model becomes less accurate when the sampling time interval is shorter; the R2 of the model drops to 40% for the time interval of 1 second, while it is around 70% when the time interval is longer than 1 minute. We postulate that this is related to the lead–lag effect between the OFI measure and the price change for shorter time intervals. We use the vector auto-regressive model to verify this conjecture.
Keywords: Granger causality, KRDS (Korea Research Data Services), order flow imbalance, limit order book event, price impact