Predicting future price volatility: Empirical evidence from an emerging limit order market

• Informativeness of limit order book (LOB) for predicting stock price volatility
• LOB supply schedule significantly predicts the future price volatility.
• Predictive power of LOB declines during the extreme market wide movements.
• Buy orders are more informative over future price volatility than sell orders.
• Sell (buy) orders are more informative during extreme market wide down (up) days.

We investigate the information content of the limit order book (LOB) on the Shanghai Stock Exchange (SHSE), a purely order-driven market. We find strong evidence that the LOB slope consistently and significantly predicts the future price volatility. However, this predictive power of the LOB declines during extreme market-wide movements. We also find that buy orders are more informative for future price volatility than sell orders, but sell (buy) orders become more informative during extreme market-wide down (up) movement days. Finally, we document that the predictive power of the LOB is short lived and markets are efficient over the longer time horizon. These results are helpful in understanding market efficiency and the traders' order submission strategies on the fast growing market of SHSE.