How does liquidity behave? A multidimensional analysis of NYSE stocks

In a continuous trading market, taking efficiency as given, variations in liquidity can be measured by simultaneous changes in both inmediacy costs and depth. Past theoretical and empirical microstructure literature is, however, one-dimensional. Only a reduced number of empirical studies consider inmediacy costs and depth proxies together. Using intraday data from the NYSE, this paper deals with how liquidity regularly behaves and how it reacts to changing market conditions by concurrently analyzing intraday regular patterns of alternative inmediacy costs and depth measures. A new liquidity measure called BLM is introduced that captures simultaneous changes in both liquidity dimensions. It is evidenced that intraday patterns in market making costs can (at least partially) explain the regular changes in liquidity and that only volatility changes have an unambiguous effect on liquidity. In this way, this study looks in greater depth into, and is able to give more general conclusions about, the general behavior and the determinants of liquidity at the NYSE