Revealing Intraday Market Efficiency -- Estimating Diurnal Price Densities in Limit Order Books

Liquidity plays an important role in trading and represents a nontrivial economic concept that is difficult to measure as it involves several three dimensions to investigate. In this paper, we explore the liquidity in electronic markets by estimating a time-varying gamma distribution of volume adjusted prices for both bid and ask side of in the order book. Applying this framework on London Stock Exchange SETS order books during the continuous trading hours, we found a seasonal behaviour for the distribution parameters, implying a certain periodic intraday pattern of the market's liquidity and, hence, its efficiency.