Market reaction to temporary liquidity crises and the permanent market impact

Details Market reaction to temporary liquidity crises and the permanent market impact Market reaction to temporary liquidity crises and the permanent market impact

2006-08-03

arxiv.org/abs/physics/0608032v1

Physics

Physics and Society

12 pages, 12 figures

Scientific paper

We study the relaxation dynamics of the bid-ask spread and of the midprice after a sudden, large variation of the spread, corresponding to a temporary crisis of liquidity in a double auction financial market. We find that the spread decays very slowly to its normal value as a consequence of the strategic limit order placement of liquidity providers. We consider several quantities, such as order placement rates and distribution, that affect the decay of the spread. We measure the permanent impact both of a generic event altering the spread and of a single transaction and we find an approximately linear relation between immediate and permanent impact in both cases.

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