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Weather and Time Series Determinants of Liquidity in a Limit Order Market

Author

Listed:
  • Ioanid Rosu

    (university of chicago - booth school of business - University of Chicago)

  • Juhani Linnainmaa

    (university of chicago - booth school of business - University of Chicago)

Abstract

When liquidity is measured by the bid-ask spread or price impact, markets with more trading activity are typically more liquid than markets with less trading activity. But showing a causal connection from trading activity to spreads is difficult because these variables are endogenous. In the case of Finland's fully electronic limit order market, we use deseasonalized sunshine as an instrument for trading activity, and find that indeed higher trading activity causes lower spreads in the time series. We introduce another instrument for spreads and show that causality runs the other way as well: lower bid-ask spreads invite more trading activity. By using the lagged CBOE Volatility Index as an instrument, we also find that an exogenous increase in intra-day volatility causes larger spreads.

Suggested Citation

  • Ioanid Rosu & Juhani Linnainmaa, 2009. "Weather and Time Series Determinants of Liquidity in a Limit Order Market," Working Papers hal-00515903, HAL.
    • Handle: RePEc:hal:wpaper:hal-00515903
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    Cited by:

    1. Michael Frömmel & Frederick Van Gysegem, 2012. "Spread Components in the Hungarian Forint-Euro Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 52-69, May.
    2. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers 49, Brandeis University, Department of Economics and International Business School.
    3. Mynbaev, Kairat, 2020. "Using full limit order book for price jump prediction," MPRA Paper 101684, University Library of Munich, Germany.
    4. Nicola Secomandi & Sunder Kekre, 2014. "Optimal Energy Procurement in Spot and Forward Markets," Manufacturing & Service Operations Management, INFORMS, vol. 16(2), pages 270-282, May.
    5. Ban Zheng & Eric Moulines & Frédéric Abergel, 2013. "Price jump prediction in a limit order book," Post-Print hal-00684716, HAL.

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