Liquidity commonality in order-driven trading: evidence from the Athens Stock Exchange

Panagiotis Anagnostidis, George Papachristou and Nikos S. Thomaidis

Applied Economics, 2016, vol. 48, issue 22, 2007-2021

Abstract: We examine the presence of liquidity commonality in the order-driven Athens Stock Exchange (ASE). Unlike the majority of liquidity commonality studies that focus on the bid--ask spread, our analysis extends deeper in the Limit Order Book, providing insight on the price impact of both small and large trades. We utilize a 6-month FTSE/ATHEX-20 intraday data set to estimate the liquidity factor model of Chordia et al. (2000). To this end, we conduct single-equation analysis as well as panel data analysis with the use of two-way clustered errors, correcting for simultaneous firm and time correlations. Moreover, we apply standard principal component analysis on stock liquidities to extract the marketwide liquidity component. We find that liquidity commonality is low at the bid--ask spread, whereas it increases deeper in the book; consequently, large traders face liquidity risks associated with both individual stock and marketwide illiquidity. Moreover, our empirical evidence hints that liquidity commonality is asynchronous, suggesting that the ASE trading process includes various levels of information speed. Our analysis contributes to the understanding of liquidity commonality in order-driven trading, especially in emerging markets like the ASE where trading activity is limited and information speed is low.

Date: 2016
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DOI: 10.1080/00036846.2015.1111991

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