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Liquidity dynamics in an electronic open limit order book: An event study approach

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  • Gomber, Peter
  • Schweickert, Uwe
  • Theissen, Erik

Abstract

We analyze the dynamics of liquidity in Xetra, an electronic open limit order book. We use the Exchange Liquidity Measure (XLM), a measure of the cost of a roundtrip trade of given size V. This measure captures the price and the quantity dimension of liquidity. We present descriptive statistics, analyze the cross-sectional determinants of the XLM measure and document its intraday pattern. Our main contribution is an analysis of the dynamics of the XLM measure around liquidity shocks. We use intraday event study methodology to analyze how a shock affects the XLM measure. We consider two sets of liquidity shocks, large transactions (which are endogenous events because they originate in the market) and Bloomberg ticker news items (which are exogenous events because they originate outside of the market). We find that resiliency after large transactions is high, i.e., liquidity quickly reverts to normal levels. We further document that large trades take place at times when liquidity is unusually high. We interpret this as evidence that large transactions are timed. The Bloomberg ticker news items do not have a discernible effect on liquidity. --

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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 11-14.

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Date of creation: 2011
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Handle: RePEc:zbw:cfrwps:1114

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Keywords: liquidity; limit order book; resiliency;

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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. Beltran-Lopez, Héléna & Giot, Pierre & Grammig, Joachim G., 2009. "Commonalities in the order book," CFR Working Papers, University of Cologne, Centre for Financial Research (CFR) 09-05, University of Cologne, Centre for Financial Research (CFR).
  3. Maria Kasch-Haroutounian & Erik Theissen, 2009. "Competition between Exchanges: Euronext versus Xetra," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 15(1), pages 181-207.
  4. John R. Graham & Jennifer L. Koski & Uri Loewenstein, 2006. "Information Flow and Liquidity around Anticipated and Unanticipated Dividend Announcements," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 79(5), pages 2301-2336, September.
  5. Angelo Ranaldo, 2002. "Market Dynamics Around Public Information Arrivals," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp45, International Center for Financial Asset Management and Engineering.
  6. van Achter, Mark, 2008. "Dynamic limit order market with diversity in trading horizons," CFS Working Paper Series, Center for Financial Studies (CFS) 2008/46, Center for Financial Studies (CFS).
  7. Large, Jeremy, 2007. "Measuring the resiliency of an electronic limit order book," Journal of Financial Markets, Elsevier, Elsevier, vol. 10(1), pages 1-25, February.
  8. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-74.
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