Understanding the ex-ante cost of liquidity in the limit order book: a note

Abstract

El presente trabajo estima una nueva medida de coste de liquidez de los activos financieros en un mercado dirigido por órdenes. Esta medida, denominada función de liquidez, recoge el coste ex-ante de comprar y vender simultáneamente una determinada cantidad de acciones haciendo uso de toda la información ofrecida por el libro de órdenes. De esta manera se superan las dificultades que la consideración por separado de la horquilla de precios o la profundidad ocasiona sobre la caracterización de la liquidez de los diferentes activos.

This paper estimates a new measure of liquidity costs in a market driven by orders. It represents the cost of simultaneously buying and selling a given amount of shares, and it is given by a single measure of ex-ante liquidity that aggregates all available information in the limit order book for a given number of shares. The cost of liquidity is an increasing function relating bid-ask spreads with the amounts available for trading. This measure completely characterizes the cost of liquidity of any given asset. It does not suffer from the usual ambiguities related to either the bid-ask spread or depth when they are considered separately. On the contrary, with a single measure, we are able to capture all dimensions of liquidity costs on ex-ante basis.