Liquidity Commonality Beyond Best Prices

This paper investigates the commonality of liquidity in an open limit order bookmarket. We find that commonality in liquidity becomes stronger the deeper we lookinto the limit order book. While commonality is only about 2% at the best prices, itincreases up to about 20% inside the limit order book. Furthermore, we find strongtime variation in commonality both on an intradaily basis and with the movement ofthe market return. Our study thus suggests that previous estimates of commonalitydo not hold for liquidity beyond best prices. Therefore, systematic liquidity risk ina limit order book market is much higher than previous evidence implies.