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How does liquidity react to stress periods in a limit order market?

  • Helena Beltran

    ()

    (Université catholique de Louvain, CORE)

  • Alain Durré

    ()

    (Catholic University of Lille, Institut d'Économie Scientifique et de Gestion
    National Bank of Belgium, Research Department)

  • Pierre Giot

    ()

    (University of Namur
    CORE, Université catholique de Louvain)

This paper looks at the interplay of volatility and liquidity on the Euronext trading platform during the December 2, 2002 to April 30, 2003 time period. Using transaction and order book data for some large- and mid-cap Brussels-traded stocks on Euronext, we study the ex-ante liquidity vs volatility and ex-post liquidity vs volatility relationships to ascertain if the high volatility led to decreases in liquidity and large trading costs. We show that the provision of liquidity remains adequate when volatility increases, although we do find that it is more costly to trade and that the market dynamics is somewhat affected when volatility is high.

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File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp49.pdf
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Paper provided by National Bank of Belgium in its series Working Paper Research with number 49.

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Length: 67 pages
Date of creation: May 2004
Handle: RePEc:nbb:reswpp:200405-5
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  1. BAUWENS, Luc & BEN OMRANE, Walid & GIOT, Pierre, 2003. "News announcements, market activity and volatility in the Euro/Dollar foreign exchange market," CORE Discussion Papers 2003029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Order Imbalance, Liquidity, and Market Returns," University of California at Los Angeles, Anderson Graduate School of Management qt7gh9t9w3, Anderson Graduate School of Management, UCLA.
  3. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
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  10. BAUWENS, Luc & GIOT, Pierre, . "Asymmetric ACD models: Introducing price information in ACD models," CORE Discussion Papers RP 1670, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Michael A. Goldstein & Kenneth A. Kavajecz, . "Liquidity Provision during Circuit Breakers and Extreme Market Movements," Rodney L. White Center for Financial Research Working Papers 01-00, Wharton School Rodney L. White Center for Financial Research.
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  22. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, vol. 7(1), pages 53-74, January.
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