Liquidity in high resolution in limit order markets

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Abstract

This paper investigates, in high resolution, the role of liquidity in a limit order market. Liquidity in these markets has two parts - a liquidity store and liquidity flow (time dimension). We model the liquidity residing in a limit order book and the liquidity flow from the latent order book, using a fully probabilistic model. Using a sample of stocks from NASDAQ 100 we find that liquidity residing in the order book, within five levels each on either side of the transaction price and the flow to this liquidity pool from the latent order book can explain the wealth traded through the trading system, when observed in business time. The explanatory power is satisfactory in high resolution and short periods of business time but weaker in aggregated longer time periods. We observe that the liquidity pool for large part of the trading day goes into a steady state equilibrium.

Keywords

High resolution, Liquidity, Vine copula regression, Bayesian hierarchial models, Limit order markets, Market Microstructure

Article

Pani, S., 2021. Liquidity in high resolution in limit order markets. International Journal of Financial Markets and Derivatives8(1), pp.23-49, Doi: 10.1504/IJFMD.2021.113844

Preprint