Market reaction to temporary liquidity crises and the permanent market impact

Adam Ponzi, Fabrizio Lillo and Rosario Mantegna

Papers from arXiv.org

Abstract: We study the relaxation dynamics of the bid-ask spread and of the midprice after a sudden, large variation of the spread, corresponding to a temporary crisis of liquidity in a double auction financial market. We find that the spread decays very slowly to its normal value as a consequence of the strategic limit order placement of liquidity providers. We consider several quantities, such as order placement rates and distribution, that affect the decay of the spread. We measure the permanent impact both of a generic event altering the spread and of a single transaction and we find an approximately linear relation between immediate and permanent impact in both cases.

Date: 2006-08
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