Abstract
We investigate the information content of the limit order book (LOB) on the Tokyo Stock Exchange, the world’s second largest order-driven market. We find that high frequency microstructure parameters, such as the current cost-to-trade 1% of average daily volume and LOB slope, contain information about future trade price location, price volatility, speed of trading, return autocorrelation and cross-correlation. We also document that the average trade size in LOB is the driving force in the standard volume–volatility relationship, which is contrary to previous findings for other markets. These results are helpful in understanding the price discovery process in a purely order driven market and have potential applications in academics and industry for optimizing the order submission strategies.
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