Liquidity commonality and return co-movement

Domowitz, Ian; Hansch, Oliver; Wang, Xiaoxin

doi:10.1016/j.finmar.2005.06.001

Cited by 99 publications

(68 citation statements)

References 14 publications

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“…Since liquidity suppliers compete fiercely for new price priority, the bid-ask spread and depth at best prices are subject to strong idiosyncratic variation. This hypothesis is consistent with Domowitz, Hansch and Wang (2005) who show that order type correlation has far more explanatory power for liquidity commonality inside the limit order book than at the best prices.…”

Section: Introductionsupporting

confidence: 89%

“…Our paper is most closely related to the work of Bauer (2004) and Domowitz, Hansch and Wang (2005). Bauer (2004) …”

Section: Introductionmentioning

confidence: 65%

“…The empirical evidence on this issue is ambiguous. For the US market, Coughenour and Saad (2004) find that in falling markets specialist behavior tends to be more strongly correlated across the stocks that they manage than in rising markets, while Domowitz, Hansch and Wang (2005) observe no systematic differences for the Australian market.…”

Section: Introductionmentioning

confidence: 91%

“…Domowitz, Hansch and Wang (2005) investigate the impact of order-type and order-flow correlations on return and liquidity commonality. We differ from these papers in three ways: firstly, we focus on how commonality in liquidity depends on how deep we look into the limit order book (as opposed to its relation with underlying financial variables or order-type and order-flow commonality).…”

Section: Performs a Principal Componentmentioning

confidence: 99%

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Liquidity Commonality Beyond Best Prices

Kempf

Mayston

2008

J of Financial Research

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Previous market microstructure research focuses on commonality in liquidity at the inside spread. However, liquidity at the inside spread only determines the systematic liquidity risk of small and medium trades. We study commonality in displayed liquidity beyond best prices, which determines the systematic liquidity risk of large trades. We show that it is much larger than commonality at the inside spread. The deeper we look into the order book, the higher is the level of commonality. In addition, it rises in the morning and when markets fall. 2008 The Southern Finance Association and the Southwestern Finance Association.

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Section: Introductionsupporting

confidence: 89%

“…Our paper is most closely related to the work of Bauer (2004) and Domowitz, Hansch and Wang (2005). Bauer (2004) …”

Section: Introductionmentioning

confidence: 65%

Section: Introductionmentioning

confidence: 91%

Section: Performs a Principal Componentmentioning

confidence: 99%

See 2 more Smart Citations

Liquidity Commonality Beyond Best Prices

Kempf

Mayston

2008

J of Financial Research

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“…high mean reversion speed of liquidity prices after shocks. Domowitz et al (2005) employ the cost of round trip to analyze liquidity commonality and…”

Section: Introductionmentioning

confidence: 99%

The Impact of Order Size on Stock Liquidity - A Representative Study

Stange

Kaserer

2008

SSRN Journal

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Liquidity, the ease of trading an asset, strongly varies between di erent sizes of stock positions. We analyze this aspect using the Xetra Liquidity Measure (XLM), which calculates daily, weighted spread for impatient traders transacting against the limit order book. For this measure, we have data for 160 German stocks over 5.5 years, which allows us a representative analysis of the order-size impact on liquidity cost and its main statistical characteristics.We nd that in the sample period average liquidity costs rose to over 100bp in large DAX and to 460bp in large SDAX positions. Over the last 5.5 years, liquidity has equally improved across all order sizes. Liquid position sizes, however, su ered less badly during the recent sub-prime crises, which represents another type of the ight-to-liquidity.As the basis for further theoretical analysis, we nd that trends in liquidity levels and ine ciencies in liquidity prices of large positions generate non-normality in the liquidity distribution. We also show that -as a rule of thumb -liquidity of an order size relative to market value and transaction volume is constant across stocks and time. While order size is not the most important liquidity determinant, doubling order size increases liquidity cost by 5-10% on average when accounting for other di erences in stocks.

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Order Flow

Lillo

2010

Encyclopedia of Quantitative Finance

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We present the definition of the different components of the order flow in a double auction market characterized by a limit order book. We present some statistical regularities of order flow observed by separately considering market orders, limit orders, and cancellations. The unconditional regularities include the fat‐tailed distribution of order volume and the long memory of order signs. For limit orders and cancellations, we also present unconditional statistical regularities on the limit price of the order. We then discuss how the submission rate of different types of orders is dependent on the size of the bid–ask spread and on the depth of the market. We discuss the selective liquidity taking mechanism, that is, how market order volumes are influenced by the volume at the best. Finally, we discuss some empirical results on commonalities of order flow across a portfolio of stocks.

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Liquidity commonality and return co-movement

Cited by 99 publications

References 14 publications

Liquidity Commonality Beyond Best Prices

Liquidity Commonality Beyond Best Prices

The Impact of Order Size on Stock Liquidity - A Representative Study

Order Flow

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