Endogenous Dynamics of Intraday Liquidity

Abstract

This article investigates the endogenous information contained in four liquidity variables at a five-minute time scale on equity markets around the world: the traded volume, the bid–ask spread, the volatility, and the volume at first limits of the order book. In the spirit of Granger causality, the authors measure the level of information. It covers 300 stocks from four different markets (United States, United Kingdom, Japan, and Hong Kong) from a period of over five years. It appears that, from the viewpoint of these variables, the natural memory of the endogenous dynamics of liquidity spans from half an hour to a few hours, depending on some characteristics of the considered stock. Moreover, new stylized facts emerge from the vectorial linear autoregressive models on deseasonalized versions of the logarithm of these variables at a time scale that is of paramount importance for optimal trading and optimal liquidation strategies, including index rebalancing, and for transaction cost analysis.