Abstract
We quantify the short-run and long-run price effect of posting a limit order in an order book market by proposing a high-frequency cointegrated VAR model for quotes and order book depth. Estimating impulse response functions based on data from 30 stocks traded at Euronext Amsterdam we show that limit orders have significant market impacts. The strength and direction of quote responses depend on the incoming orders' aggressiveness, their size and the state of the book. The effects are qualitatively stable across the market. Cross-sectional variations in the magnitudes of price impacts are well explained by the underlying trading frequency and relative tick size.
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