There are two essays in this thesis. The theme is the study of microstructure of the Stock Exchange of Hong Kong (SEHK), an order driven market. Essay 1 is 'An Empirical Investigation of the Limit Order Book of an order driven market'. One of the characteristics of order driven market is that the limit order book is public information available to all traders. The first essay looks into the properties of the limit order book of SEHK. In particular, we make use of the economic concept of price elasticity to summarize the slope information of the bid and ask price schedule of the limit order book. We find that the shape of the bid and ask price schedules is concave. We also find that intraday pattern of the slope is an inverted U-shape. This indicates that demand of stock is relatively in...[ Read more ]

There are two essays in this thesis. The theme is the study of microstructure of the Stock Exchange of Hong Kong (SEHK), an order driven market. Essay 1 is 'An Empirical Investigation of the Limit Order Book of an order driven market'. One of the characteristics of order driven market is that the limit order book is public information available to all traders. The first essay looks into the properties of the limit order book of SEHK. In particular, we make use of the economic concept of price elasticity to summarize the slope information of the bid and ask price schedule of the limit order book. We find that the shape of the bid and ask price schedules is concave. We also find that intraday pattern of the slope is an inverted U-shape. This indicates that demand of stock is relatively inelastic at the open and close of a trading day. Such results lend support to the Brock and Kleidon (1992) model. Essay 2 is 'Comovement of liquidity in an order driven market'. Chordia et al (2000) document the existence of liquidity comovement in NYSE, a quote driven market with market specialists providing liquidity. We make use of both the Chordia et al (2000) market model as well as principal component analysis to study liquidity comovement on the SEHK, an order driven market that does not have a market making institution. Our results confirm that liquidity comovement is a common feature of stock market trading, irrespective of market making arrangements. We also find that liquidity comovement is not a systematic risk priced by the market. However, we caution that a more detailed research should be conducted to look into the possible relationship between stock expected return and liquidity comovement.