The Dynamics of Ex-ante High-Frequency Liquidity: An Empirical Analysis

Georges Dionne () and Xiaozhou Zhou ()
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Xiaozhou Zhou: HEC Montreal, Canada Research Chair in Risk Management

No 15-5, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: The ex-ante liquidity embedded in an open Limit Order Book (LOB) and its dynamics have been one of the most important issues in financial research and evolves with the development of financial infrastructure. Using the tick-by-tick data and the reconstructed open LOB data from the Xetra trading system, we investigate the impact of trade duration, quote duration and other exogenous variables on ex-ante liquidity embedded in an open LOB. By taking into account Ultra High Frequency (UHF) data, our modeling involves decomposing the joint distribution of the ex-ante liquidity measure into simple and interpretable distributions. The decomposed factors are Activity, Direction and Size. Our results suggest that trade durations and quote durations do influence the ex-ante liquidity changes. Short-run variables, such as spread change and volume, also predict the probability of liquidity changes. The long-term variable trade imbalance is less informative.

Keywords: Decomposition model; Limit order book; Xetra Liquidity Measure (XLM); Ex-ante liquidity; LogACD process. (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2016-01-14
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2015_005

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