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Liquidity commonality beyond best prices

  • Kempf, Alexander
  • Mayston, Daniel
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    This paper investigates the commonality of liquidity in an open limit order book market. We find that commonality in liquidity becomes stronger the deeper we look into the limit order book. While commonality is only about 2% at the best prices, it increases up to about 20% inside the limit order book. Furthermore, we find strong time variation in commonality both on an intradaily basis and with the movement of the market return. Our study thus suggests that previous estimates of commonality do not hold for liquidity beyond best prices. Therefore, systematic liquidity risk in a limit order book market is much higher than previous evidence implies.

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    File URL: http://econstor.eu/bitstream/10419/57745/1/700635890.pdf
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    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-04.

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    Date of creation: 2006
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    Handle: RePEc:zbw:cfrwps:0604
    Contact details of provider: Postal: 0221 / 470 5607
    Phone: 0221 / 470 5607
    Fax: 0221 / 470 5179
    Web page: http://cfr-cologne.de/english/version06/html/home.php
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