Cross Market Commonalities in the Liquidity Dimensions on the Open Spot Market
Abstract
We analyze multiple liquidity and liquidity-related measures derived from the pre-trade transparency data of an open market (Level 2 Quotes). This paper addresses dimensionality reduction and pricing of co-moving liquidity measures. We evaluate correlation matrix that reveals market-wide commonalities in liquidity measures and then categorize respective measures into groups forming factors that are linearly orthogonal to each other. Herewith we discover unique and common sources of information that are independent of each other. Out of 20 liquidity measures and liquidity-related variables there are only 4 factors reflecting orthogonal dimensions. Variables related to the limit order book resilience contribute to price discovery.
Cross Market Commonalities in the Liquidity Dimensions on the Open Spot Market
We analyze multiple liquidity and liquidity-related measures derived from the pre-trade transparency data of an open market (Level 2 Quotes). This paper addresses dimensionality reduction and pricing of co-moving liquidity measures. We evaluate correlation matrix that reveals market-wide commonalities in liquidity measures and then categorize respective measures into groups forming factors that are linearly orthogonal to each other. Herewith we discover unique and common sources of information that are independent of each other. Out of 20 liquidity measures and liquidity-related variables there are only 4 factors reflecting orthogonal dimensions. Variables related to the limit order book resilience contribute to price discovery.