Order Imbalance, Order Book Slope and the Volume-Volatility Relation

Abstract

This paper investigates the effect of number of trades, average trade size, order imbalance and order book slope on volatility. Examining three interest rate futures (90-day Bank Accepted Bill, 3-Year Treasury Bond and 10-Year Treasury Bond) traded on the Australian Securities Exchange, it is documented that the number of trades has a more significant impact on volatility than the average trade size. Supportive evidence is also observed for the explanatory power of order imbalance and order book slope on volatility but these two variables are not the main factors determining the relation between volatility and number of trade and size of trades.