The impact of hidden liquidity in limit order books

This paper analyzes liquidity in an order driven market. We only investigate the best limits in the limit order book, but also take into account the book behind these inside prices. When subsequent prices are close to th
This paper analyzes liquidity in an order driven market. We only investigate the best limits in the limit order book, but also take into account the book behind these inside prices. When subsequent prices are close to the best ones and depth at them is substantial, larger orders can be executed without an extensive price impact and without deterring liquidity. We develop and estimate several econometric models, based on depth and prices in the book, as well as on the slopes of the limit order book. The dynamics of different dimensions of liquidity are analyzed: prices, depth at and beyond the best prices, as well as resiliency, i.e. how fast the different liquidity measures recover after a liquidity shock. Our results show a somewhat less favorable image of liquidity than often found in the literature. After a liquidity shock (in the spread or depth or in the book beyond the best limits), several dimension of liquidity deteriorate at the same time. Not only does the inside spread increase, and depth at the best prices decrease, also the difference between subsequent bid and ask prices may become larger and depth provided at them decreases. The impacts are both econometrically and economically significant. Also, our findings point to an interaction between different measures of liquidity, between liquidity at the best prices and beyond in the book, and between ask and bid side of the market. JEL Classification: G10
show moreshow less

Download full text files

Export metadata

  • Export Bibtex
  • Export RIS

Additional Services

    Share in Twitter Search Google Scholar
Metadaten
Author:Gunther Wuyts
URN:urn:nbn:de:hebis:30-62322
Series (Serial Number):CFS working paper series (2008, 53)
Document Type:Working Paper
Language:English
Date of Publication (online):2009/01/29
Year of first Publication:2008
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2009/01/29
Tag:Limit Order Book Slopes ; Limit Order Markets ; Liquidity ; Liquidity Shocks; Resiliency
HeBIS PPN:210306513
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

$Rev: 11761 $