Liquidity commonality does not imply liquidity resilience commonality: a functional characterisation for ultra-high frequency cross-sectional LOB data

DOI10.1080/14697688.2015.1071075MaRDI QIDQ4683065zbMATH OpenOpenAlexFDO

Authors Efstathios Panayi, Gareth W. Peters, Ioannis Kosmidis

Publication date 19 September 2018

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1406.5486

zbMATH Keywords

functional PCAfunctional regressionlimit order bookliquidityresilience

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Portfolio theory (91G10)

Abstract: We present a large-scale study of commonality in liquidity and resilience across assets in an ultra high-frequency (millisecond-timestamped) Limit Order Book (LOB) dataset from a pan-European electronic equity trading facility. We first show that extant work in quantifying liquidity commonality through the degree of explanatory power of the dominant modes of variation of liquidity (extracted through Principal Component Analysis) fails to account for heavy tailed features in the data, thus producing potentially misleading results. We employ Independent Component Analysis, which both decorrelates the liquidity measures in the asset cross-section, but also reduces higher-order statistical dependencies. To measure commonality in liquidity resilience, we utilise a novel characterisation as the time required for return to a threshold liquidity level. This reflects a dimension of liquidity that is not captured by the majority of liquidity measures and has important ramifications for understanding supply and demand pressures for market makers in electronic exchanges, as well as regulators and HFTs. When the metric is mapped out across a range of thresholds, it produces the daily Liquidity Resilience Profile (LRP) for a given asset. This daily summary of liquidity resilience behaviour from the vast LOB dataset is then amenable to a functional data representation. This enables the comparison of liquidity resilience in the asset cross-section via functional linear sub-space decompositions and functional regression. The functional regression results presented here suggest that market factors for liquidity resilience (as extracted through functional principal components analysis) can explain between 10 and 40% of the variation in liquidity resilience at low liquidity thresholds, but are less explanatory at more extreme levels, where individual asset factors take effect.

Recommendations

• Resiliency of the limit order book
• High-Frequency Volatility and Liquidity
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• Measuring liquidity commonality in financial markets
• scientific article; zbMATH DE number 7307119

Cites work

• CALCULATION OF THE SMOOTHING SPLINE WITH WEIGHTED ROUGHNESS MEASURE
• Continuous Auctions and Insider Trading
• ggplot2. Elegant graphics for data analysis
• Robust principal component analysis?
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Cited in

(3)

• Resiliency of the limit order book
• Measuring liquidity commonality in financial markets
• Market-wide commonality in liquidity on the CEE-3 emerging stock markets

Describes a project that uses

Uses Software

• FastICA
• fastICA
• R
• ggplot2

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