Explaining Liquidity Dynamics in the Order Driven FX Spot Market

Katarzyna Bień-Barkowska

doi:https://doi.org/10.59139/ps.2014.03.1

Katarzyna Bień-Barkowska Warsaw School of Economics Przegląd Statystyczny. Statistical Review, vol. 61, 2014, 3, pages: 223-244 Published online: 30 September 2014 DOI https://doi.org/10.59139/ps.2014.03.1

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ABSTRACT

The paper investigates the dynamics of several intraday liquidity measures for the Reuters Dealing 3000 Spot Matching System that constitutes a major order driven interbank spot market for the EUR/ PLN. We derive the time-of-day and the day-of-week effects for different liquidity variables representing the shape of the limit order book. In order to capture the strong persistence exhibited by liquidity, the long memory Autoregressive Conditional Duration (ACD) models are applied. Special attention is paid to the impact of information arrival on liquidity fluctuations. We document the signifi cant positive impact of probability of informed trading (PIN) on the price impact of trading and the bid-ask spread and the negative impact of the PIN on the liquidity supply on the ask side of the market (orders to sell euro), after controlling for the effects of other covariates such as the trading volume, volatility or previously observed returns.

KEYWORDS

market microstructure, order-driven market, probability of informed trading, ACD models

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