Commonalities in the Order Book

Abstract

Recent contributions to microstructure theory hint at commonalities in the price-depth pairs which constitute the open limit order book. In this paper we provide empirical evidence that indeed a small number of latent factors, two for each side of the book, capture most of the variation in the price-depth pairs. The results also indicate that a heterogenous trader population is active on the buy and sell sides. The respective latent factors explaining the buy and sell side variation exhibit specific dynamics. When we exploit results from microstructure theory to empirically assess whether the majority of the book variation is due to either informational effects or non-informational fluctuations of liquidity we obtain mixed results.

Liquidity Commonality Beyond Best Prices

“…Coppejans, Domowitz, Madhavan (2003) focus on dynamic issues of the limit order book. Beltran, Giot and Grammig (2005) relate commonalities across price-volume pairs of the limit order book to underlying microstructural factors.…”

Competition in securities markets: the impact on liquidity

“…The error term ε i,t consists of a factor common to all stocks (ξ t ) capturing the commonality in liquidity as documented, e.g., in Beltran-Lopez et al (2009), and a stock-specific term (η i,t ). We compute the changes within the quartiles of our two panels, A and B, as…”

Trading Activity and Liquidity Supply in a Pure Limit Order Book Market. An Empirical Analysis Using a Multivariate Count Data Model

“…activity Beltran-Lopez, Giot, and Grammig (2004) propose to employ Principal Components Analysis (PCA) for the analysis of commonalities in the limit order book. We adopt their approach to analyze the impact of the order book state beyond the inside market on trading activity.…”

“…We follow Beltran-Lopez, Giot, and Grammig (2004) and employ the Principal Compo-nents Analysis (PCA) methodology to extract latent factors which can explain a considerable fraction of the variation of market liquidity. Consistent with hypotheses derived from the theoretical analyses in Foucault (1999) and Handa, Schwartz, and Tiwari (2003) we find that the first two extracted principal components, associated with a latent "liquidity'…”