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The information content of a limit order book : the case of an FX market

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Kozhan, Roman and Salmon, Mark H. (Mark Howard), 1949-. (2012) The information content of a limit order book : the case of an FX market. Journal of Financial Markets , Vol.15 (No.1). pp. 1-28. ISSN 1386-4181

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Official URL: http://dx.doi.org/10.1016/j.finmar.2011.07.002

Abstract

In this paper we examine the question of whether knowledge of the information contained in a limit order book helps to provide economic value in a simple trading scheme. Given the greater information content of the order book, over simple price information, it might naturally be expected that the order book would dominate. Using Dollar Sterling tick data, we find that despite the in-sample statistical significance of variables describing the structure of the limit order book in explaining tick-by-tick returns, they do not consistently add significant economic value out-of-sample. We show this using a simple linear model to determine trading activity, as well as a model-free genetic algorithm based on price, order flow, and order book information. We also find that the profitability of all trading rules based on genetic algorithms dropped substantially in 2008 compared to 2003 data.

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Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Foreign exchange market -- Econometric models
Journal or Publication Title:	Journal of Financial Markets
Publisher:	Elsevier BV
ISSN:	1386-4181
Date:	2012
Volume:	Vol.15
Number:	No.1
Number of Pages:	28
Page Range:	pp. 1-28
Identification Number:	10.1016/j.finmar.2011.07.002
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/39608