Liquidity, Volume, and Order Imbalance Volatility

75 Pages Posted: 7 Mar 2019 Last revised: 14 Jan 2021

See all articles by Vincent Bogousslavsky

Vincent Bogousslavsky

Boston College - Department of Finance

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Date Written: January 11, 2021

Abstract

We examine the dynamics of liquidity using a comprehensive sample of U.S. stocks in the post-decimalization period. Motivated by a continuous-time inventory model, we compute a high-frequency measure of order imbalance volatility to proxy for the inventory risk faced by liquidity providers. We show that high-frequency order imbalance volatility is an important driver of liquidity and explains the often positive time-series relation between spread and volume for large stocks, which seems to run counter most theoretical models. Furthermore, order imbalance volatility is priced in the cross-section of stock returns.

Keywords: liquidity, volume, volatility, order imbalance, inventory risk, adverse selection

JEL Classification: G10, G12, G14

Suggested Citation

Bogousslavsky, Vincent and Collin-Dufresne, Pierre, Liquidity, Volume, and Order Imbalance Volatility (January 11, 2021). Swiss Finance Institute Research Paper No. 19-69, Available at SSRN: https://ssrn.com/abstract=3336171 or http://dx.doi.org/10.2139/ssrn.3336171

Vincent Bogousslavsky (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
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Switzerland

National Bureau of Economic Research (NBER)

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United States

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