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How does liquidity react to stress periods in a limit order market?

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Author Info

  • Helena Beltran

    ()
    (Université catholique de Louvain, CORE)

  • Alain Durré

    ()
    (Catholic University of Lille, Institut d'Économie Scientifique et de Gestion
    National Bank of Belgium, Research Department)

  • Pierre Giot

    ()
    (University of Namur
    CORE, Université catholique de Louvain)

Abstract

This paper looks at the interplay of volatility and liquidity on the Euronext trading platform during the December 2, 2002 to April 30, 2003 time period. Using transaction and order book data for some large- and mid-cap Brussels-traded stocks on Euronext, we study the ex-ante liquidity vs volatility and ex-post liquidity vs volatility relationships to ascertain if the high volatility led to decreases in liquidity and large trading costs. We show that the provision of liquidity remains adequate when volatility increases, although we do find that it is more costly to trade and that the market dynamics is somewhat affected when volatility is high.

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP49.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 49.

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Length: 67 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:nbb:reswpp:200405-5

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Keywords: order book; volatility; liquidity;

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