Rethinking Zero Returns in the Liquidity Puzzle of a Limit Order Market

Abstract

The frequency of zero returns has often been used as a proxy for illiquidity in the finance literature. Based on Euronext intraday data, we show that zero returns are significantly related to liquidity instead. We conduct an event study and run conditional logit regressions, using spread, depth, dispersion and slope measures as liquidity variables. Although we find that zero returns are associated with less informed trading as previously outlined in the literature, this does not necessarily lead to higher illiquidity.

Keywords: Zero return, liquidity, informed trading, limit order book, market microstructure

JEL Classification: G14