Liquidity in High Resolution in Limit Order Markets

30 Pages Posted: 26 Oct 2020 Last revised: 10 Nov 2020

Date Written: April 30, 2020

Abstract

This paper investigates, in high resolution, the role of liquidity in a limit order market. Liquidity in these markets has two parts - a liquidity store and liquidity flow (time dimension). We model the liquidity residing in a limit order book and the liquidity flow from the latent order book, using a fully probabilistic model. Using a sample of stocks from NASDAQ 100 we find that liquidity residing in the order book, within five levels each on either side of the transaction price and the flow to this liquidity pool from the latent order book can explain the wealth traded through the trading system, when observed in business time. The explanatory power is satisfactory in high resolution and short periods of business time but weaker in aggregated longer time periods. We observe that the liquidity pool for large part of the trading day goes into a steady state equilibrium.

Keywords: High resolution, Liquidity, Vine copula regression, Bayesian hierarchial models, Limit order markets, Market Microstructure

Suggested Citation

Pani, Sudhanshu Sekhar, Liquidity in High Resolution in Limit Order Markets (April 30, 2020). Available at SSRN: https://ssrn.com/abstract=3718671 or http://dx.doi.org/10.2139/ssrn.3718671

Sudhanshu Sekhar Pani (Contact Author)

School of Business Management, NMIMS ( email )

V. L. Mehta Road,
Vile Parle (W),
Mumbai, 400 056
India

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