Order flow and volatility: An empirical investigation |
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| Institution: | 1. Erasmus University Rotterdam, The Netherlands;2. Tinbergen Institut, The Netherlands;3. University of Bristol, United Kingdom;4. CREATES, Denmark;5. ERIM, The Netherlands;1. 260 Mendoza College of Business Administration, University of Notre Dame, Notre Dame, IN 46556, USA;2. Carey Business School, Johns Hopkins University, 100 International Dr., Baltimore, MD 21202, USA |
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| Abstract: | We study the relationship between order flow and volatility. To this end we develop a comprehensive framework that simultaneously controls for the effects of macro announcements and order flow on prices and the effect of macro announcements on volatility. Using high-frequency 30-year U.S. Treasury bond futures data, we find a statistically and economically significant relationship between the absolute value of order flow and volatility. Moreover, this relationship is robust, inter alia, to a number of factors including the introduction of liquidity effects, use of data measured over a different frequency, and market conditions. |
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