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

42 Pages Posted: 7 Feb 2013 Last revised: 30 Apr 2015

See all articles by Paolo Mazza

Paolo Mazza

IESEG School of Management; LEM CNRS 9221

Date Written: January 1, 2015

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

Suggested Citation

Mazza, Paolo, Rethinking Zero Returns in the Liquidity Puzzle of a Limit Order Market (January 1, 2015). Available at SSRN: https://ssrn.com/abstract=2212101 or http://dx.doi.org/10.2139/ssrn.2212101

Paolo Mazza (Contact Author)

IESEG School of Management ( email )

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HOME PAGE: http://https://sites.google.com/site/paolomazzaphd/

LEM CNRS 9221 ( email )

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