Order flow and volatility: An empirical investigation

• Published in: Journal of empirical finance Vol. 28; pp. 185 - 201
• Main Authors: Opschoor, Anne, Taylor, Nick, van der Wel, Michel, van Dijk, Dick
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.09.2014
• Subjects: Data analysis; Effects; Information; Liquidity; Macroeconomic announcements; Order flow; Prices; Treasury; Treasury futures; U.S.A; Value; Volatility; Order flow; Macroeconomic announcements; Treasury futures; G14; E44; Information
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2014.07.002

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. •Volatility dynamics in the 30-year US Treasury bond futures market are examined.•We develop a comprehensive framework for intraday return and volatility effects.•We study the order flow - volatility relationship and control for macro news.•Order flow is highly significant (both statistically and economically).•An interpretation of our findings is that private information matters for volatility.