Resiliency of the limit order book |
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Institution: | 1. University of Quebec in Montreal, Department of Finance, Graduate School of Business (ESG-UQÀM), H3C 4R2, Canada;2. Université Paris Dauphine, DRM Finance, Place de Lattre de Tassigny, 75116 Paris, France |
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Abstract: | This study contributes to our understanding of the liquidity replenishment process in limit order book markets. A measure of resiliency is proposed and quantified for different liquidity shocks through the impulse response functions generated from a high frequency vector autoregression. The model reveals a rich set of liquidity dynamics. Liquidity shocks were found to have immediate detrimental effects on other dimensions of liquidity but the replenishment process generally occurs quickly, indicating limit order books are resilient. Cross-sectionally, resiliency is found to be consistently high across all large stocks, consistent with competition for liquidity provision coming from computerized algorithms. For other stocks, greater variation in resiliency is observed, indicating more selective participation by these liquidity providers. |
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Keywords: | Resiliency Liquidity Limit order book Liquidity shocks |
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