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Commonalities in the order book

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  • Beltran-Lopez, Héléna
  • Giot, Pierre
  • Grammig, Joachim G.

Abstract

This paper uses data from one of the most important European stock markets and shows that, in line with predictions from theoretical market microstructure, a small number of latent factors captures most of the variation in stock specific order books. We show that these order book commonalities are much stronger than liquidity commonality across stocks. The result that bid and ask side as well as the visible and hidden parts of the order book exhibit quite specific dynamics is interpreted as evidence that open order book markets attract a heterogeneous trader population in terms of asset valuations and impatience. Quantifying the informational content of the extracted factors with respect to the evolution of the asset price we find that the factor information shares are highest (about ten percent) for less frequently traded stocks. We also show that the informational content of hidden orders is limited. --

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Bibliographic Info

Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 09-05.

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Date of creation: 2009
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Handle: RePEc:zbw:cfrwps:0905

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Keywords: limit order book; commonalities; liquidity; market microstructure;

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References

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  1. Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2001. "Limit Order Book as a Market for Liquidity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2889, C.E.P.R. Discussion Papers.
  2. Karl Ludwig Keiber, 2005. "The Informational Content of Transactions," Financial Markets and Portfolio Management, Springer, Springer, vol. 19(1), pages 47-60, June.
  3. Paul Brockman & Dennis Y. Chung, 2002. "Commonality in Liquidity: Evidence from an Order-Driven Market Structure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 521-539.
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  6. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1655-89, December.
  7. Coughenour, Jay F. & Saad, Mohsen M., 2004. "Common market makers and commonality in liquidity," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(1), pages 37-69, July.
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  16. Pierre Giot & Joachim Grammig, 2002. "How large is liquidity risk in an automated auction market?," University of St. Gallen Department of Economics working paper series 2002, Department of Economics, University of St. Gallen 2002-23, Department of Economics, University of St. Gallen.
  17. Ananth N. Madhavan, . "Trading Mechanisms in Securities Markets," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-90, Wharton School Rodney L. White Center for Financial Research.
  18. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, American Finance Association, vol. 49(4), pages 1127-61, September.
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Citations

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Cited by:
  1. Hagströmer, Björn & Anderson, Richard G. & Binner, Jane & Nilsson, Birger, 2009. "Dynamics in Systematic Liquidity," Working Papers, Lund University, Department of Economics 2009:7, Lund University, Department of Economics.
  2. Kempf, Alexander & Mayston, Daniel, 2006. "Liquidity commonality beyond best prices," CFR Working Papers 06-04, University of Cologne, Centre for Financial Research (CFR).
  3. Gomber, Peter & Schweickert, Uwe & Theissen, Erik, 2011. "Liquidity dynamics in an electronic open limit order book: An event study approach," CFR Working Papers 11-14, University of Cologne, Centre for Financial Research (CFR).
  4. Michael Chlistalla & Marco Lutat, 2011. "Competition in securities markets: the impact on liquidity," Financial Markets and Portfolio Management, Springer, Springer, vol. 25(2), pages 149-172, June.
  5. Grammig, Joachin & Heinen, Andreas & Rengifo, Erick, 2004. "Trading activity and liquidity supply in a pure limit order book market: An empirical analysis using a multivariate count data model," MPRA Paper 8115, University Library of Munich, Germany.

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