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Understanding liquidity: a closer look at the limit order book

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  • Martínez, Miguel Ángel
  • Rubio, Gonzalo

Abstract

This paper estimates a new measure of liquidity costs in a market driven by orders. It represents the cost of simultaneously buying and selling a given amount of shares, and it is given by a single measure of liquidity which is just an increasing function relating bid-ask spreads with size. This measure completely characterizes the cost of liquidity of any given asset. It does not suffer from the usual ambiguities related to either the bid-ask spread or depth when they are considered separately. With a single measure, we are able to capture all dimensions associated with liquidity costs. The seasonality behavior of the liquidity cost is also analyzed.

Suggested Citation

  • Martínez, Miguel Ángel & Rubio, Gonzalo, 2000. "Understanding liquidity: a closer look at the limit order book," DEE - Working Papers. Business Economics. WB 9961, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
  • Handle: RePEc:cte:wbrepe:9961
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    References listed on IDEAS

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    7. McInish, Thomas H & Wood, Robert A, 1992. "An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-764, June.
    8. Pascual, Roberto, 2000. "BLM: bidimensional approach to measure liquidity," DEE - Working Papers. Business Economics. WB 9958, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
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    Cited by:

    1. Helena, BELTRAN & Alain, DURRE & Pierre, GIOT, 2004. "Volatility regimes and the provisions of liquidity in order book markets," Discussion Papers (ECON - Département des Sciences Economiques) 2005015, Université catholique de Louvain, Département des Sciences Economiques.
    2. Helena Beltran & Alain Durré & Pierre Giot, 2004. "How does liquidity react to stress periods in a limit order market?," Working Paper Research 49, National Bank of Belgium.
    3. Brusco, Sandro & Manzano, Carolina, 2003. "Price discovery in the pre-opening period. theory and evidence from the madrid stock exchange," DEE - Working Papers. Business Economics. WB wb035814, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.

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    More about this item

    Keywords

    Liquidity function;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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