Limit order book and commonality in liquidity

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.

Financial Review

Financial Review

48

1540-6288

N/A

1

26