Liquidity commonality beyond best prices

Alexander Kempf and Daniel Mayston

No 06-04, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: This paper investigates the commonality of liquidity in an open limit order book market. We find that commonality in liquidity becomes stronger the deeper we look into the limit order book. While commonality is only about 2% at the best prices, it increases up to about 20% inside the limit order book. Furthermore, we find strong time variation in commonality both on an intradaily basis and with the movement of the market return. Our study thus suggests that previous estimates of commonality do not hold for liquidity beyond best prices. Therefore, systematic liquidity risk in a limit order book market is much higher than previous evidence implies.

Keywords: Order-Driven Markets; Liquidity Commonality (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:0604

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