Volatility Regimes and the Provision of Liquidity in Order Book Markets

CORE Discussion Paper No. 2005/12

41 Pages Posted: 8 Feb 2006

See all articles by Helena M. Beltran-Lopez

Helena M. Beltran-Lopez

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Pierre Giot

Facultés Universitaires Notre-Dame de la Paix (FUNDP)

Date Written: December 2004

Abstract

We analyze whether the liquidity provision in a pure order book market during normal market conditions (low volatility regime) differs from what is observed when the market is under stress (high volatility regime). We show that the static relationship between liquidity and volatility is resilient to regime changes in volatility. Nevertheless, we do find that it is more costly to trade when volatility is large. A VAR analysis shows that the liquidity dynamics is similar in the low and high volatility regimes, although the drop in liquidity subsequent to volatility shocks is larger in the high volatility regime. Finally, the market is more resilient to volatility or liquidity shocks in periods of turmoils.

Keywords: order book, volatility, liquidity

JEL Classification: G10, C32

Suggested Citation

Beltran-Lopez, Helena M. and Durre, Alain C. J. and Giot, Pierre, Volatility Regimes and the Provision of Liquidity in Order Book Markets (December 2004). CORE Discussion Paper No. 2005/12, Available at SSRN: https://ssrn.com/abstract=880433 or http://dx.doi.org/10.2139/ssrn.880433

Helena M. Beltran-Lopez (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

Pierre Giot

Facultés Universitaires Notre-Dame de la Paix (FUNDP) ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

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