Bid- and Ask-Side Liquidity in the NYSE Limit Order Book

Abstract

We disentangle bid- and ask-side liquidity using 11 years of comprehensive NYSE limit order book data and document that this has important implications for understanding the determinants, commonalities and pricing of liquidity. First, the ask- but not bid-side liquidity of financial stocks deteriorates during the 2008 short selling ban. Second, bid-side (ask-side) liquidity decreases (increases) in lagged short- and long-term returns, indicating persistent contrarian behavior in limit orders. Third, liquidity commonality increases during the financial crisis, more so on the bid than on the ask side. Finally, ask- but not bid-side illiquidity predicts daily returns, while both forecast monthly returns.

Keywords: Market Liquidity, Limit Order Book, Financial Crisis, Short Selling Ban, Asset Pricing

JEL Classification: G12