Title: Limit order book liquidity and moments of the return distribution
Authors: Tolga Cenesizoglu - HEC Montreal and LSE (Canada) [presenting]
Abstract: The relationship between liquidity provision through limit orders and the moments of the return distribution is analyzed. Assuming exogenous random order arrivals, we predict that (i) volatility increases in ask and bid side illiquidity (as measured by the price impact parameter) (ii) skewness increases in illiquidity imbalance and (iii) kurtosis increases in the convexity of the price impact function. We verify these relations using 11 year of comprehensive NYSE limit order book (LOB) data. We establish causality by examining the impact of regulatory shocks to LOB liquidity provision on the moments of returns using diff-in-diff analyses.