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Liquidity, Volume, and Order Imbalance Volatility

Author

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  • VINCENT BOGOUSSLAVSKY
  • PIERRE COLLIN‐DUFRESNE

Abstract

We examine the dynamics of liquidity using a comprehensive sample of U.S. stocks in the post‐decimalization period. Motivated by a continuous‐time inventory model, we compute a high‐frequency measure of order imbalance volatility to proxy for the inventory risk faced by liquidity providers. We show that high‐frequency order imbalance volatility is an important driver of liquidity and explains the often positive time‐series relation between spread and volume for large stocks, which seems to run counter to most theoretical models. Furthermore, order imbalance volatility is priced in the cross‐section of stock returns.

Suggested Citation

  • Vincent Bogousslavsky & Pierre Collin‐Dufresne, 2023. "Liquidity, Volume, and Order Imbalance Volatility," Journal of Finance, American Finance Association, vol. 78(4), pages 2189-2232, August.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:4:p:2189-2232
    DOI: 10.1111/jofi.13248
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    Cited by:

    1. Paul, Thomas & Aryoubi, Abdullah & Walther, Thomas, 2025. "Reassessing the Illiquidity-Return Relationship: Evidence from Germany, the UK, and the U.S," International Review of Financial Analysis, Elsevier, vol. 106(C).
    2. Atanasova, Christina & Miao, Terrel & Segarra, Ignacio & Willeboordse, Frederick, 2025. "Aggregate illiquidity and crypto option returns," Finance Research Letters, Elsevier, vol. 85(PC).

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