Volatility regimes and order book liquidity: Evidence from the Belgian segment of Euronext

We analyze whether the liquidity provision in a pure order book market undergoes regime changes when volatility switches from a low state to a high state. In a five-month case study centered on the second Gulf war, we show that the contemporaneous relationship between liquidity and volatility is resilient to regime changes in volatility. Nevertheless, we do find that it is more costly to trade when volatility is large. A VAR analysis also shows that the liquidity dynamics is similar in the low and high volatility regimes, although the drop in liquidity subsequent to volatility shocks is larger in the high volatility regime.