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Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong

Authors

  • Hee-Joon Ahn,

  • Kee-Hong Bae,

  • Kalok Chan

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    • Ahn is from Sookmyung Women's University; Bae and Chan are from the Hong Kong University of Science and Technology. We are grateful to an anonymous referee, René Stulz (the editor), Warren Bailey, Hyuk Choe, Thierry Foucault, Ira Horowitz, Jun-Koo Kang, Michael Melvin, Jonathan Moulton, and seminar participants at the Hong Kong University of Science and Technology for their helpful comments. We thank Karen Lam of the Stock Exchange of Hong Kong for her description of the exchange trading system. We also thank Sandra Moore for editorial assistance. Ahn gratefully acknowledges financial support from the City University of Hong Kong Strategic Grant (No. 7000892). Any remaining errors are our own.

ABSTRACT

We investigate the role of limit orders in the liquidity provision in a pure order-driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed.

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