The Information Content of Limit Order Book and Short-term Stock Returns based on Information Technology

This paper proposes a set of measurement to analyze the information content of limit order book based on cointegration theory and error correction model, and conduct empirical studies using the tick-by-tick transaction data of Shanghai Stock Exchange 180 Index components. Empirical results indicate that limit-order book is informative, even the orders other than the best bid and ask can also contribute approximately 41% to the price discovery. Further, this paper also pays a lot of attention to examine the relationships between the limitorder book and the short-run future return of the stocks. We find that the information of a limit-order book can help investors to forecast the future short-term return and thus improve the overall welfare of them.