Resiliency in Limit Order Book Markets: A Dynamic View of Liquidity

Kempf, Alexander; Mayston, Daniel; Gehde-Trapp, Monika; Yadav, Pradeep K.

doi:10.2139/ssrn.967249

Cited by 5 publications

(5 citation statements)

References 8 publications

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“…Finally, resiliency measures the speed at which depth is replenished over time following a shock to liquidity. We follow Kempf, Mayston, and Yadav () and estimate the following dynamic model for each stock‐day:

0true normalΔ d e p t h_{τ} = α - κ \cdot d e p t h_{τ} + \sum_{k = 1}^{K} γ_{k} normalΔ d e p t h_{τ - k} + ε_{τ},

where

d e p t h_{τ}

is the quoted depth at the end of the τ th time interval, and Δ is the first‐difference operator. Our estimation is based on one‐minute intervals and five lags.…”

Section: The Effect On Market Qualitymentioning

confidence: 99%

See 1 more Smart Citation

Financial Transaction Taxes, Market Composition, and Liquidity

Colliard¹,

Hoffmann

2017

The Journal of Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes.You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. licence. www.econstor.eu If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated Working Paper SeriesFinancial transaction taxes, market composition, and liquidity Jean-Edouard Colliard, Peter HoffmannDisclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. No 2030 / February 2017 ABSTRACTWe use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term investors. Finally, our findings show that moderate aggregate effects on market quality can mask large adjustments made by individual agents. Non-technical summaryThis paper empirically examines the 2012 introduction of a financial transaction tax (FTT) on equity trading in France. We motivate our analysis by contrasting two opposing strands of theoretical literature that make opposing predictions on the impact of such as policy. Models based on "composition effects"suggest that FTTs will primarily affect agents that are the source of excessive stock price volatility (socalled noise traders), and thus improve market quality. However, other researchers question the relevance of this channel and instead highlight a "liquidity effect" with opposing consequences. They argue that reduced market participation lowers liquidity, which makes markets more volatile and prices less efficient as arbitrageurs face higher costs for correcting price dislocations.Our empirical analysis shows that, following the policy change, average trading volume decreased by around 10%, and this development was accompanied by a moderate ...

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0true normalΔ d e p t h_{τ} = α - κ \cdot d e p t h_{τ} + \sum_{k = 1}^{K} γ_{k} normalΔ d e p t h_{τ - k} + ε_{τ},

where

d e p t h_{τ}

is the quoted depth at the end of the τ th time interval, and Δ is the first‐difference operator. Our estimation is based on one‐minute intervals and five lags.…”

Section: The Effect On Market Qualitymentioning

confidence: 99%

“…The resulting estimate of κ for stock i on day t , denoted

r e s i l i e n c y_{i, t}

, is our measure of resiliency, as a larger coefficient estimate indicates faster mean‐reversion. Economically,

(ln 2) / κ

measures the half‐life of a shock to market depth; see Kempf, Mayston, and Yadav ().…”

Section: The Effect On Market Qualitymentioning

confidence: 99%

Financial Transaction Taxes, Market Composition, and Liquidity

Colliard¹,

Hoffmann

2017

The Journal of Finance

View full text Add to dashboard Cite

show abstract

“…Amihud (2002) and Arnott and Wagner (1990) emphasize that liquidity is not directly observable because its measurement would require data about the difference between the actual execution price of a trade and the market price that would have prevailed in the absence of the transaction. The theoretical literature agrees that liquidity is a multidimensional construct which is not directly observable (e. g. Amihud, 2002;Kyle, 1985;Liu, 2006;Kempf et al, 2009). Although there is agreement on the multidimensionality of liquidity, disagreement prevails about the dimensions of liquidity, both on the number of dimensions and the actually relevant dimensions.…”

Section: Dimensions Of Liquiditymentioning

confidence: 99%

“…Kyle (1985) identifies three dimensions namely tightness, depth and resiliency. Kempf et al (2009) agree that liquidity has three dimensions but define them as spread, depth and resiliency. Liu (2006) mentions four dimensions of liquidity that are trading volume, trading costs, trading speed and price impact.…”

Section: Dimensions Of Liquiditymentioning

confidence: 99%