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Liquidity Commonality Beyond Best Prices

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  • Alexander Kempf
  • Daniel Mayston

Abstract

Previous market microstructure research focuses on commonality in liquidity at the inside spread. However, liquidity at the inside spread only determines the systematic liquidity risk of small and medium trades. We study commonality in displayed liquidity beyond best prices, which determines the systematic liquidity risk of large trades. We show that it is much larger than commonality at the inside spread. The deeper we look into the order book, the higher is the level of commonality. In addition, it rises in the morning and when markets fall.

Suggested Citation

  • Alexander Kempf & Daniel Mayston, 2008. "Liquidity Commonality Beyond Best Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 31(1), pages 25-40, March.
    • Handle: RePEc:bla:jfnres:v:31:y:2008:i:1:p:25-40
    DOI: 10.1111/j.1475-6803.2008.00230.x
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