Understanding the ex-ante cost of liquidity in the limit order book: A note
This paper estimates a new measure of liquidity costs in a market driven by orders. It represents thecost of simultaneously buying and selling a given amount of shares, and it is given by a single measure of ex-ante liquidity that aggregates all available information in the limit order book for a given number of shares. The cost of liquidity is an increasing function relating bid-ask spreads with the amounts available for trading. This measure completely characterizes the cost of liquidity of any given asset. It does not suffer from the usual ambiguities related to either the bid-ask spread or depth when they are considered separately. On the contrary, with a single measure, we are able to capture all dimensions of liquidity costs on ex-ante basis.
|Date of creation:||Jan 2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.dfaeii.ehu.es
More information through EDIRC
|Order Information:|| Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain|
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.:
- 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, vol. 50(5), pages 1655-89, December.
- Chung, Kee H. & Van Ness, Bonnie F. & Van Ness, Robert A., 1999. "Limit orders and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 53(2), pages 255-287, August.
- Easley, David & O'Hara, Maureen, 1987. "Price, trade size, and information in securities markets," Journal of Financial Economics, Elsevier, vol. 19(1), pages 69-90, September.
- Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000.
"Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE,"
Journal of Financial Economics,
Elsevier, vol. 56(1), pages 125-149, April.
- Michael A. Goldstein & Kenneth A. Kavajecz, . "Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE," Rodney L. White Center for Financial Research Working Papers 14-98, Wharton School Rodney L. White Center for Financial Research.
- de Jong, F.C.J.M. & Nijman, T.E. & Röell, A.A., 1996. "Price effects of trading and components of the bid-ask spread on the Paris Bourse," Other publications TiSEM 08f5fa19-14b7-4bc8-ba07-1, Tilburg University, School of Economics and Management.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- de Jong, Frank & Nijman, Theo & Roell, Ailsa, 1996.
"Price effects of trading and components of the bid-ask spread on the Paris Bourse,"
Journal of Empirical Finance,
Elsevier, vol. 3(2), pages 193-213, June.
- de Jong, F.C.J.M. & Nijman, T.E. & Roell, A.A., 1994. "Price effects of trading and components of the bid-ask spread on the Paris Bource," Discussion Paper 1994-54, Tilburg University, Center for Economic Research.
- McInish, Thomas H & Wood, Robert A, 1992. " An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-64, June.
- Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
- 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, vol. 6(2), pages 345-74.
- Lin, Ji-Chai & Sanger, Gary C & Booth, G Geoffrey, 1995. "Trade Size and Components of the Bid-Ask Spread," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1153-83.
When requesting a correction, please mention this item's handle: RePEc:ehu:dfaeii:200203. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alcira Macías Redondo)
If references are entirely missing, you can add them using this form.