The tail risks of FX return distributions: a comparison of the returns associated with limit orders and market orders

TL;DR

This study compares the tail risks of limit and market orders in FX trading using Extreme Value Theory, revealing that limit orders tend to have significantly heavier tails and larger tail quantiles than market orders.

Contribution

It provides a novel comparison of tail risks between limit and market orders based on actual transaction data using EVT, unlike previous studies relying on indicative quotes.

Findings

Limit orders have significantly heavier tails than market orders.

Both order types exhibit similar tail behavior overall.

Limit orders show larger tail quantiles than market orders.

Abstract

This paper measures and compares the tail risks of limit and market orders using Extreme Value Theory. The analysis examines realised tail outcomes using the Dealing 2000-2 electronic broking system based on completed transactions rather than the more common analysis of indicative quotes. In general, limit and market orders exhibit broadly similar tail behaviour, but limit orders have significantly heavier tails and larger tail quantiles than market orders.