Trading activity and liquidity supply in a pure limit order book market: An empirical analysis using a multivariate count data model.

Abstract

In this paper we perform an empirical analysis of the trading process in a pure limit order book market, the Xetra system which operates at various European exchanges.We study how liquidity supply and demand as well as price volatility affect future trading activity and market resiliency, and discuss the results in the light of predictions implied by theoretical models of financial market microstructure. Parameter estimation and hypotheses testing is conducted using a new econometric methodology designed for the analysis of multivariate count processes.Market microstructure; Liquidity; Trading activity; Multivariate count process