Reducing transaction costs using intraday forecasts of limit order book slopes

Abstract

AbstractMarket participants who need to trade a significant number of securities within a given period can face high transaction costs. In this paper, we document how improvements in intraday liquidity forecasts can help reduce total transaction costs. We compare various approaches for forecasting intraday transaction costs, including autoregressive and machine learning models, using comprehensive ultra‐high‐frequency limit order book data for a sample of NYSE stocks from 2002 to 2012. Our results indicate that improved liquidity forecasts can significantly decrease total transaction costs. Simple models capturing seasonality in market liquidity tend to outperform alternative models.