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Liquidity: Persistence and Forecast in Open Electronic Limit Order Book Market

This paper investigates the relationship between serial correlation in liquidity which is measured by impact cost from limit order book datasets, rate of information flow and trading activity. Hourly absolute return acts as the rate of information flow whereas hourly mean trade duration and hourly mean rupees traded volume are measures for trading activity. The paper finds that persistence of impact cost is negatively related with the information flow and positively affected by trading activity. We document the empirical evidence that trading period which is characterised by high volatility and high mean rupees traded volume has a negative impact on the persistence of liquidity. We provide the support for the hypothesis that liquidity of one side of limit order book leads to the other side. Finally, the paper shows that time series model of impact cost performs better than the naive model in a one step ahead prediction.