The Dynamics of Ex-Ante High-Frequency Liquidity: An Empirical Analysis

Abstract

Using tick-by-tick data and the reconstructed open LOB data from the Xetra trading system, we investigate the impact of trade duration, quote duration and other exogenous variables on ex-ante liquidity embedded in an open LOB. Our modeling involves decomposing the joint distribution of the ex-ante liquidity measure into simple and interpretable distributions. The decomposed factors are Activity, Direction and Size. Our results suggest that trade durations and quote durations do influence the exante liquidity changes. Short-run variables, such as spread change and volume, also predict the probability of liquidity changes.