Cross-Sectional Liquidity Interactions from Intraday Perspectives

This is the first empirical study on non-idiosyncratic liquidity components that investigates different intraday time periods during the trading session based on complete tick-by-tick order book data from the Xetra electronic trading system of the Frankfurt Stock Exchange (FSE). We apply non-overlapping cost of round-trip measures, which allows capturing liquidity in different regions of the entire limit order book. To extract common factors in liquidity, we rely on cross-sectional principal components analysis (PCA). Since PCA provides no interpretation of the extracted systematic factors, we propose a robust multi-stage PCA and regression approach to investigate cross-sectional liquidity determinants and their interactions in detail. We detect considerable influence of market-wide liquidity and furthermore show which factors count for the intraday variation in liquidity commonality. Moreover, it is empirically demonstrated that systematic liquidity is strongly related to common factors in stock returns, and also to market-wide buying or selling pressures.