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A Study on Brexit: Correlations and Tail Events Distribution of Liquidity Measures

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. In this study, some of the existing liquidity measures are studied and analyzed during Brexit. We examine Utilities Select Sector SPDR Fund (Exchange-Traded Fund) components in this study. The time period covers June 16, 2016 to June 30, 2016 which includes Brexit event day. We use high-frequency tick level Trade data, Quote data, and Limit Order Book data. We study the sample of Trade and Quote liquidity measures (TAQL) and Limit Order Book liquidity measures (LOBL). Our study shows that the correlations between these two liquidity groups (TAQL & LOBL) have significant relationship with the returns of the underlying ETF components. Furthermore, the analysis shows that low correlation between TAQL and LOBL indicates high probability of large price change. Finally, we study the empirical distributions, which implies that Brexit generated fatter tails on liquidity measures distributions. This indicates that infrequent (low) liquidity condition occurs more frequently during Brexit.