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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | Predictability of limit order book prices |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 47 |
| Date | 2015 |
| Abstract Text | Financial markets of various asset classes have seen an increasing transition to orderdriven markets in recent years. Considering the greater transparency of the limit order book over simple information on best prices available in quote-driven markets, the assumption that this extended insight into the order book might contain some predictive content follows naturally. The literature however is not in absolute agreement about which aspects are relevant in explaining price movements or if there is a signi cant relationship at all. This thesis addresses the question of whether the information contained within a limit order book regarding quoted interest and actual trades can help explain the future evolution of the mid price. For this purpose, a broad set of measurements to describe the state of the order book and information on trades therein is proposed and an empirical analysis using data from a major foreign exchange interbank market is conducted. An empirical strategy is employed that builds the forecasting model for the mid price returns endogenously from the most informative variables provided to the procedure. Analysis of the models selected by the strategy reveals that the features of the order book selected as informative predictors are consistent with the broader literature on limit order books. However, the empirical results obtained from these models cannot con rm signi cant predictability of mid price returns. In contrast, the analysis identi es that the information from the limit order book helps explaining the direction of very short-term price movements. These ndings are consistent across the evaluated currency pairs and forecast horizons. The thesis concludes that while mid price returns seem dicult to predict, a directional forecast for the very short-term is possible to some extent. This could be interpreted that that the limit order book in fact conveys some predictive content, which is however not fully identi ed by the constructed models. |
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