Limit Order Book and Commonality in Liquidity

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.     

Equilibrium in a Dynamic Limit Order Market

We model a dynamic limit order market as a stochastic sequential game with rational traders. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markov‐perfect equilibrium. We then generate artificial time series and perform comparative dynamics. Conditional on a transaction, the midpoint of the quoted prices is not a good proxy for the true value. Further, transaction costs paid by market order submitters are negative on average, and negatively correlated with the effective spread. Reducing the tick size is not Pareto improving but increases total investor surplus.     

Liquidity Provision of Limit Order Trading in the Futures Market Under Bull and Bear Markets

Abstract:  This study investigates how limit orders affect liquidity in a purely order-driven futures market. Additionally, the possible asymmetric relationship between market depth and transitory volatility in bull and bear markets and the effect of institutional trading on liquidity provision behavior are examined as well. The empirical results demonstrate that subsequent market depth increases as transient volatility increases in bull markets. Market depth exhibits significantly positive relationship to subsequent transient volatility in bull markets. Additionally, although trading volume positively influences transient volatility in bull markets, no such relationship exists in bear markets. Liquidity provision decreases when institutional trading activity intensifies during bear markets. Thus, liquidity provision for limit orders differs between bull and bear markets.     

中国股票市场限价指令簿的信息含量研究

金融市场微观结构是当前金融研究中发展迅速的研究领域。随着电子撮合交易制度的发展,从限价指令簿的角度揭示金融资产的价格行为,对市场规则和交易机制的完善有重要的意义。本文选取2009年9月上证180指数所包含的180只个股的高频交易数据为研究对象,实证检验了限价指令簿的信息含量。研究发现限价指令簿是富含信息的,即使是最优买卖报价外的指令信息对于价格发现的贡献也高达53%。我们还实证研究了限价指令簿与股票未来短期回报之间的关系,得到限价指令簿信息能够帮助投资者预测股票未来短期回报和有助于提高投资者福利的结论。     

Aggressive Orders and the Resiliency of a Limit Order Market

We analyze the resiliency of a pure limit order market by investigating the limit order book (bid and ask prices, spreads, depth and duration), order flow and transaction prices in a window of best limit updates and transactions around aggressive orders (orders that move prices). We find strong persistence in the submission of aggressive orders. Aggressive orders take place when spreads and depths are relatively low, and they induce bid and ask prices to be persistently different after the shock. Depth and spread remain also higher than just before the order, but do return to their initial level within 20 best limit updates after the shock. Relative to the sample average, depths stay around their mean before and after aggressive orders, whereas spreads return to their mean after about twenty best limit updates. The initial price impact of the aggressive order is partly reversed in the subsequent transactions. However, the aggressive order produces a long-term effect as prices show a tendency to return slowly to the price of the aggressive order.We thank Theo Nijman, Erik Theissen, Rob van den Goorbergh, Josef Zechner (editor) and an anonymous referee for valuable comments on an earlier draft as well as seminar participants at the EEA-conference in Venice, the CFS Conference on Market Design in Eltville, CORE, Leuven and Tilburg. The first and last authors gratefully acknowledge financial assistance from FWO-Flanders under contract G.0333.     

Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market

This article presents a new methodology for testing economicrestrictions on the price schedules offered in a limit orderbook that are based on (i) break-even conditions for marginallimit orders and (ii) rational updating conditions for orderbook revisions over time. Using order flow data from the StockholmStock Exchange, I find strong evidence of insufficient depthin the limit order books relative to the theoretical predictions.An extended model, which allows the model parameters to dependon market conditions, captures some of the systematic variationin the observed order book depth.     

Is the Electronic Open Limit Order Book Inevitable?

Under fairly general conditions, the article derives the equilibrium price schedule determined by the bids and offers in an open limit order book. The analysis shows: (1) the order book has a small-trade positive bid-ask spread, and limit orders profit from small trades; (2) the electronic exchange provides as much liquidity as possible in extreme situations; (3) the limit order book does not invite competition from third market dealers, while other trading institutions do; (4) If an entering exchange earns nonnegative trading profits, the consolidated price schedule matches the limit order book price schedule.     

A Specialist's Quoted Depth and the Limit Order Book

By partitioning quoted depth into the specialist's contribution and the limit order book's contribution, the paper investigates whether specialists manage quoted depth to reduce adverse selection risk. The results show that both specialists and limit order traders reduce depth around information events, thereby reducing their exposure to adverse selection costs. Moreover, specialists' quotes may reflect only the limit order book on the side (or sides) of the market where they believe there is a chance of informed trading. Changes in quoted depth are consistent with specialists managing their inventory as well as having knowledge of the stock's future value.     

Volatility,Depth, and Order Composition: Evidence from a Pure Limit Order Futures Market

This paper investigates market behaviors (such as volatility, depth, and volume) and order-flow decomposition in a pure limit order futures market, the Taiwan Futures Exchange. The results are different from those in equity markets due to relatively high adverse selection costs in futures markets. We show that a volatility (depth) increase is followed by a depth (volatility) decrease; a market order increase (decrease) subsequently induces higher (lower) volatility; and a limit order increase (decrease) results in more (less) market orders and limit orders. When the upside (downside) volatility rises, buyers decrease (increase) subsequent limit bid orders, and sellers increase (decrease) limit ask orders.     

Limit Order Trading

We analyze the rationale for limit order trading. Use of limit orders involves two risks: 1) an adverse information event can trigger an undesirable execution, and 2) favorable news can result in a desirable execution not being obtained. On the other hand, a paucity of limit orders can result in accentuated short-term price fluctuations that compensate a limit order trader. Our empirical tests suggest that trading via limit orders dominates trading via market orders for market participants with relatively well balanced portfolios, and that placing a network of buy and sell limit orders as a pure trading strategy is profitable.     

政府债券市场流动性研究

政府债务管理的关键是建立具有高流动性的二级市场。影响政府债券市场流动性的因素包括产品设计、市场结构、交易机制、信息披露和税收等问题。提高市场流动性的途径包括交易的竞争性结构，将税收对流动性的负面影响最小化，提高交易信息的透明度，标准化交易和清算操作，市场参与者的多元化，确定核心资产，满足基准债的市场需求，完善回购市场和衍生工具市场的功能，培育机构投资者，充分的市场监管等。     

Repo Auctions and the Market for Liquidity

What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short‐term rates. However, auction allocations affect banks' subsequent behavior in a way that is consistent with a degree of allocational and operational inefficiency. Also, large bidders appear to have better access to the interbank market than small ones. Finally, the evidence suggests that the ECB uses collateral haircuts that do not equilibrate opportunity costs.     

Liquidity and Market Structure

Market liquidity is modeled as being determined by the demand and supply of immediacy. Exogenous liquidity events coupled with the risk of delayed trade create a demand for immediacy. Market makers supply immediacy by their continuous presence and willingness to bear risk during the time period between the arrival of final buyers and sellers. In the long run the number of market makers adjusts to equate the supply and demand for immediacy. This determines the equilibrium level of liquidity in the market. The lower is the autocorrelation in rates of return, the higher is the equilibrium level of liquidity.     

流动性、银行间市场摩擦与借贷便利类货币政策工具

通过内生引入流动性短缺银行(拆入行)对流动性盈余银行(拆出行)的流动性需求机制,本文构建了一个包含银行间市场的DSGE模型,对借贷便利类货币政策工具的传导机制和传导效果进行了理论和实证研究。研究表明:(1)负向冲击会同时增加拆入行和拆出行对流动性的预防性需求,在经济形势不确定的情形下,拆出行不会很快恢复对拆入行的流动性供给,引起银行间市场流动性缺口放大和市场失灵。(2)由于仅依赖银行间市场自发回归稳态的过程太过缓慢,需要央行进行流动性干预。借贷便利类工具可以通过引导贷款市场定价和流动性效应这两个渠道来影响银行融资可得性,进而降低银行间市场流动性风险对宏观经济的负面影响。(3)借贷便利类货币政策工具的影响效果边际递减,央行可根据借贷便利操作的收益和成本,制定最佳的反应程度参数。     

流动性、银行间市场摩擦与借贷便利类货币政策工具

通过内生引入流动性短缺银行(拆入行)对流动性盈余银行(拆出行)的流动性需求机制,本文构建了一个包含银行间市场的DSGE模型,对借贷便利类货币政策工具的传导机制和传导效果进行了理论和实证研究。研究表明:(1)负向冲击会同时增加拆入行和拆出行对流动性的预防性需求,在经济形势不确定的情形下,拆出行不会很快恢复对拆入行的流动性供给,引起银行间市场流动性缺口放大和市场失灵。(2)由于仅依赖银行间市场自发回归稳态的过程太过缓慢,需要央行进行流动性干预。借贷便利类工具可以通过引导贷款市场定价和流动性效应这两个渠道来影响银行融资可得性,进而降低银行间市场流动性风险对宏观经济的负面影响。(3)借贷便利类货币政策工具的影响效果边际递减,央行可根据借贷便利操作的收益和成本,制定最佳的反应程度参数。     

Market Value of REIT Liquidity

We examine the relation between firm value and liquidity among REITs. Results show shareholders benefit from both cash and unused credit line capacity. The market values an additional dollar of cash at a premium and, as theory predicts, unused credit lines are significantly less valued than cash. Evidence suggests an increase in the market value of liquidity during the recent financial crisis. We also find that financial characteristics quantifying financial constraint influence the value of REIT financial flexibility. Most notably, the value of cash decreases with remaining credit line capacity. Although prior studies argue that cash and credit lines are substitutes, this is one of the first tests of whether the market prices this substitutability.     

Market Liquidity and Trading Activity

Previous studies of liquidity span short time periods and focus on the individual security. In contrast, we study aggregate market spreads, depths, and trading activity for U.S. equities over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile and negatively serially dependent. Liquidity plummets significantly in down markets. Recent market volatility induces a decrease in trading activity and spreads. There are strong day-of-the-week effects; Fridays accompany a significant decrease in trading activity and liquidity, while Tuesdays display the opposite pattern. Long- and short-term interest rates influence liquidity. Depth and trading activity increase just prior to major macroeconomic announcements.     

Liquidity and Optimal Market Transparency

In this paper I explore some of the consequences of greater market transparency for market performance in the presence of a strategic specialist. Although numerous studies have dealt with this issue, previous work has only considered either fully transparent or fully opaque markets. My model allows for different levels of transparency, and therefore sheds light on how transparency affects market performance. I show that an intermediate level of transparency can improve market performance relative to the more extreme cases of full transparency or no transparency at all.