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research article
Liquidity, Volume, and Order Imbalance Volatility
June 5, 2023
We examine the dynamics of liquidity using a comprehensive sample of U.S. stocks in the post-decimalization period. Motivated by a continuous-time inventory model, we compute a high-frequency measure of order imbalance volatility to proxy for the inventory risk faced by liquidity providers. We show that high-frequency order imbalance volatility is an important driver of liquidity and explains the often positive time-series relation between spread and volume for large stocks, which seems to run counter to most theoretical models. Furthermore, order imbalance volatility is priced in the cross-section of stock returns.
Type
research article
Web of Science ID
WOS:001000667700001
Authors
Publication date
2023-06-05
Publisher
Published in
Peer reviewed
REVIEWED
EPFL units
Available on Infoscience
July 3, 2023
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