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We test the effect of order book events at the best quotes on price change with the model proposed by Cont, Kukanov and Stoikov (2012). The OFI (Order Flow Imbalance) measure in the model could reasonably explain the price change of the nearby KOSPI 200 futures contract, which is one of the most liquid exchange traded securities in the world. The model gets to t less accurate when the sampling time interval become shorter; the adjusted R2 of the model drops down to 40% for the time interval of 1 second from around 70% for the cases with time interval longer than 1 minute. We postulate that this is related to the lead-lag effects between the OFI measure and price change for shorter time intervals . We use the vector auto-regressive model to verify this conjecture, which is supported by the empirical evidence. The result in the paper suggests that it is necessary to know the dynamic structure of limit order book for better understanding of high frequency price movement in a nancial market.
Keywords: Granger causality, KRDS (Korea Research Data Services), order flow imbalance, limit order book event, price impact