Limit order book and commonality in liquidity

Kang, Wenjin;Zhang, Huiping

Abstract

We show that the liquidity provided by an individual stock's limit order book comoves significantly with the market aggregate limit order book liquidity. A closer look at the inside and outside liquidity provided by different parts of limit order book suggests that inside liquidity is mainly influenced by market volatility, while idiosyncratic volatility has a larger impact on outside liquidity. Hence, limit order book inside liquidity exhibits higher commonality than outside liquidity. We also show that the comovement between the stock-level and market aggregate limit order book liquidity measures is related to the commonality in the overall stock market liquidity.

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1540-6288

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Wiley-Blackwell

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DOI

10.1111/j.1540-6288.2012.00348.x