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Volatility regimes and the provisions of liquidity in order book markets

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Author Info
Helena, BELTRAN
Alain, DURRE
Pierre, GIOT

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Abstract

We analyze whether the liquidity provision in a pure order book market during normal market conditions (low volatility regime) differs from what is observed when the market is under stress (high volatility regime). We show that the static relationship between liquidity and volatility is resilient to regime changes in volatility. Nevertheless, we do find that it is more costly to trade when volatility is large. A VAR analysis shows that the liquidity dynamics is similar in the low and high volatility regimes, although the drop in liquidity subsequent to volatility shocks is larger in the high volatility regime. Finally, the market is more resilient to volatility or liquidity shocks in periods of turnoils.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005015.

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Length: 41
Date of creation: 22 Dec 2004
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Handle: RePEc:ctl:louvec:2005015

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Related research
Keywords: order book; volatility; liquidity;

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pierre Giot & Joachim Grammig, 2006. "How large is liquidity risk in an automated auction market?," Empirical Economics, Springer, vol. 30(4), pages 867-887, January. [Downloadable!] (restricted)
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