Daily Herding and Commonality in Liquidity on a Pure Limit Order Book Market

27 Pages Posted: 26 Aug 2011

See all articles by Matthew Edgar

Matthew Edgar

ANZ (Australia and New Zealand) Banking Group, Ltd.

Petko S. Kalev

La Trobe Business School

Robert W. Faff

University of Queensland

Charly Sujoto

ANZ (Australia and New Zealand) Banking Group, Ltd.

Date Written: August 26, 2011

Abstract

Pervasive herding may cause homogenous trading patterns, both within and across stocks and thus may impact upon an important aspect of the market microstructure – liquidity. Potentially, herding could simultaneously affect the liquidity of both individual stocks and that of the market. For this reason, herding is investigated as a potential cause of 'commonality in liquidity' – a term which expresses the idea that the liquidity of individual stocks may have common determinants. We find strong evidence of commonality in liquidity in what is the first study of this phenomenon since the ASX adopted anonymous trading. The evidence with regards to the connection between herding and commonality in liquidity, however, is mixed. The results suggest that further work needs to be done to fully understand the relation between these two phenomena.

Keywords: herding, limit order book, commonality in liquidity

JEL Classification: G12, G14

Suggested Citation

Edgar, Matthew and Kalev, Petko S. and Faff, Robert W. and Sujoto, Charly, Daily Herding and Commonality in Liquidity on a Pure Limit Order Book Market (August 26, 2011). Available at SSRN: https://ssrn.com/abstract=1917148 or http://dx.doi.org/10.2139/ssrn.1917148

Matthew Edgar

ANZ (Australia and New Zealand) Banking Group, Ltd. ( email )

Melbourne, Victoria
Australia

Petko S. Kalev (Contact Author)

La Trobe Business School ( email )

Department of Economics and Finance
Donald Whitehead Building: Level 3, DWB313
Bundoora, Victoria 3086
Australia
+613 9479 6285 (Phone)
+613 9479 1654 (Fax)

HOME PAGE: http://www.latrobe.edu.au/business/about/staff/profile?uname=PKalev

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Charly Sujoto

ANZ (Australia and New Zealand) Banking Group, Ltd. ( email )

Melbourne, Victoria
Australia

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