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Limit Order Book and Commonality in Liquidity

Authors


  • The authors gratefully acknowledge the financial support from the NUS Academic Research Grants and from Shanghai University of Finance and Economics. We thank Allaudeen Hameed, Yew Wee Yong, Christophe Majois, Wataru Ohta, Qi Zeng and participants at the European Financial Management Association 2008 Annual Meeting, the Asian Finance Association (AsianFA) and the Nippon Finance Association (NFA) 2008 International Conference, 2008 China International Conference in Finance and the seminar at National University of Singapore, for their comments. We also thank the editor and two anonymous referees for their highly valuable suggestions.

School of Finance, Shanghai University of Finance and Economics, 100 Wudong Road, Shanghai, China, 200433; Phone: 86-21-6590-7469; Fax: 86-21-6510-3925; E-mail: zhang.huiping@mail.shufe.edu.cn.

Abstract

We show that the liquidity provided by an individual stock's limit order book comoves significantly with the market aggregate limit order book liquidity. A closer look at the inside and outside liquidity provided by different parts of limit order book suggests that inside liquidity is mainly influenced by market volatility, while idiosyncratic volatility has a larger impact on outside liquidity. Hence, limit order book inside liquidity exhibits higher commonality than outside liquidity. We also show that the comovement between the stock-level and market-aggregate limit order book liquidity measures is related to the commonality in the overall stock market liquidity.

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