Abstract
The nature of market liquidity is multidimensional. According to the literature, the majority of researchers follow Kyle (1985) and they distinguish between three dimensions of market liquidity as special liquidity characteristics: market depth, market tightness, and market resiliency. The paper presents a preliminary study of interaction between market depth and market tightness on the Warsaw Stock Exchange (WSE). The order ratio (OR) is employed as a proxy of market depth, while market tightness is approximated using the relative spread (RS). The 20 most liquid WSE-listed big companies are investigated. The high-frequency intraday data covers the period from January 3, 2005 to June 30, 2015. Moreover, the paper provides a robustness analysis of the obtained results with respect to the whole sample period and three adjacent subsamples of equal size: the pre-crisis, crisis, and post-crisis periods. The hypothesis concerning the statistical significance of the Fisher’s z-transformed correlation coefficients between daily values of the OR and RS indicators for each stock is tested. The empirical results reveal that although, in general, low daily order ratios are accompanied by narrow daily relative spreads (as both indicate high liquidity), and high daily order ratios are accompanied by wide daily relative spreads, the majority of correlation coefficients between daily values of the OR and RS indicators are not significantly different from zero. Furthermore, the results turn out to be robust to the choice of the sample. Our findings indicate that both ratios seem to capture various sources of market liquidity, which is consistent with the literature.
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Acknowledgements
The present study was supported by a grant S/WI/1/2014 from Bialystok University of Technology and founded from the resources for research by Ministry of Science and Higher Education.
Moreover, I am grateful to Michał Mursztyn, a computer science student at the Faculty of Computer Science, Bialystok University of Technology, for expert C++ programming assistance.
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Olbryś, J. (2017). Interaction Between Market Depth and Market Tightness on the Warsaw Stock Exchange: A Preliminary Study. In: Jajuga, K., Orlowski, L., Staehr, K. (eds) Contemporary Trends and Challenges in Finance. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-54885-2_10
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