Combining VWAP Deviation, Order Book Depth, Volume, and Volatility
Summary
The document proposes a cross-sectional trading factor that combines price location, order book imbalance, trading activity, and volatility. Its price component is the percentage difference between VWAP and the midpoint, intended to reflect whether executions lean toward aggressive buying or selling. A ratio of bid depth to ask depth represents displayed buying versus selling interest, while logarithmic total volume reduces the influence of very large activity readings.
The components are scaled by price volatility, with the stated aim of making signals more comparable across stocks. The suggested interpretation is bullish when VWAP is above the midpoint, bid depth exceeds ask depth, and volume is substantial. The page gives a conceptual recipe but no executable formula for combining the components, data horizon, treatment of zero or unstable depth, or backtest results. Order book quantities can also change quickly, so the proposed signal requires careful specification and empirical validation.
Key ideas
- The proposed factor combines VWAP deviation from midpoint with bid-to-ask depth imbalance.
- Logarithmic volume scaling is intended to limit the impact of extreme activity values.
- Dividing by price volatility is proposed to improve comparability across stocks.
- The page offers a bullish interpretation but no full formula or performance evidence.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.