The loan spread will revert to its former level
Foucault, Kadan and Kandel (2005) develop a model for a limit order market where there are only strategic liquidity traders and the choice between limit and market orders depends only on their degree of impatience. This model focuses on one of the dimensions of liquidity, namely immediacy. Traders who want to trade as soon as possible demand immediacy. This is an important feature of liquidity, insofar as traders value execution speed differently. Hence this model emphasizes the dual role of limit order books as markets where agents can demand and/or supply immediacy. Agents demand immediacy when they submit market orders and they supply immediacy when they post limit orders. Foucault, Kadan and Kandel show that in equilibrium patient traders tend to submit limit orders and impatient traders, market orders. The two key determinants of the limit order dynamics are the ratio of patient to impatient traders and their respective order arrival rates. Further, under several simplifying assumptions, the model derives the expected time to execution for limit orders, the stationary probability distribution of the spread and the expected interval between trades. Hence the model can measure market resiliency by the probability that, after a liquidity shock, the spread will revert to its former level.