How Does Liquidity React to Stress Periods in a Limit Order Market?

National Bank of Belgium Working Paper No. 49

67 Pages Posted: 14 Oct 2010

See all articles by Helena M. Beltran-Lopez

Helena M. Beltran-Lopez

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Pierre Giot

Facultés Universitaires Notre-Dame de la Paix (FUNDP)

Date Written: May 18, 2004

Abstract

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.

Keywords: order book, volatility, liquidity

JEL Classification: G10, C32

Suggested Citation

Beltran-Lopez, Helena M. and Durre, Alain C. J. and Giot, Pierre, How Does Liquidity React to Stress Periods in a Limit Order Market? (May 18, 2004). National Bank of Belgium Working Paper No. 49, Available at SSRN: https://ssrn.com/abstract=1691595 or http://dx.doi.org/10.2139/ssrn.1691595

Helena M. Beltran-Lopez (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

Pierre Giot

Facultés Universitaires Notre-Dame de la Paix (FUNDP) ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

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