Abstract
Abstract： This research examines the empirical relationship between market depth and transitory volatility of the Taiwan Stock Exchange using the electronic limit order data. The information of limit order data has been available from Taiwan Stock Market after January 2003.Empirical results show that the Taiwan Stock Market has a self-adjusting mechanism of the order flow. It indicates that market depth reduces subsequent to an increase transitory volatility. We also find the transitory volatility affects the order flow composition. When there exists an increase transitory volatility, potential sellers (buyers) will submit limit sell (buy) orders instead of market sell (buy) orders. Limit-order is used as a proxy variable of market depth. The increase of the limit order flow will cause the increase of the market depth. Then transitory volatility declines subsequent to an increase in market depth.The empirical result also shows that the different market depths of intra day and the inter day. The market depth of the Taiwan Stock Market exist a reserved-U shape under the intra day and the inter day. It indicates that the market depths are small on Monday and Friday, and at the time of the trading beginning and ending.