Understanding liquidity: a closer look at the limit order book

Miguel Ángel Martínez and Gonzalo Rubio

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: This paper estimates a new measure of liquidity costs in a market driven by orders. It represents the cost of simultaneously buying and selling a given amount of shares, and it is given by a single measure of liquidity which is just an increasing function relating bid-ask spreads with size. This measure completely characterizes the cost of liquidity of any given asset. It does not suffer from the usual ambiguities related to either the bid-ask spread or depth when they are considered separately. With a single measure, we are able to capture all dimensions associated with liquidity costs. The seasonality behavior of the liquidity cost is also analyzed.

Keywords: Liquidity; function; Liquidity; cost; Open; limit; order; book; Bid-ask; spread; Depth; Adverse; selection (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2000-07
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:9961

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