Special Issue on Noise in Condensed Matter and Complex Systems; Guest Editors: Werner Ebeling and Bernardo SpagnoloNo Access

THE KEY ROLE OF LIQUIDITY FLUCTUATIONS IN DETERMINING LARGE PRICE CHANGES

FABRIZIO LILLO

INFM Palermo Unit and Dipartimento di Fisica e Tecnologie Relative, Università di Palermo, viale delle Scienze, Edificio 18, I-90128, Palermo, Italy

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and

J. DOYNE FARMER

Santa Fe Institute, 1399 Hyde Park Road, Santa Fe, NM 87501, USA

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https://doi.org/10.1142/S0219477505002574Cited by:31 (Source: Crossref)

Abstract

Recent empirical analyses have shown that liquidity fluctuations are important for understanding large price changes of financial assets. These liquidity fluctuations are quantified by gaps in the order book, corresponding to blocks of adjacent price levels containing no quotes. Here we study the statistical properties of the state of the limit order book for 16 stocks traded at the London Stock Exchange (LSE). We show that the time series of the first three gaps are characterized by fat tails in the probability distribution and are described by long memory processes.

Keywords:

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