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2012 | OriginalPaper | Chapter

9. Estimating Market Liquidity

Author : Professor Dr. Nikolaus Hautsch

Published in: Econometrics of Financial High-Frequency Data

Publisher: Springer Berlin Heidelberg

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Abstract

Liquidity has been recognized as an important determinant of the efficient working of a market. Following the conventional definition of liquidity, an asset is considered as being liquid if it can be traded quickly, in large quantities and with little impact on the price. According to this concept, the measurement of liquidity requires to account for three dimensions of the transaction process: time, volume and price. Kyle (1985) defines liquidity in terms of the tightness indicated by the bid-ask spread, the depth corresponding to the amount of one-sided volume that can be absorbed by the market without inducing a revision of the bid and ask quotes and resiliency, i.e., the time in which the market returns to its equilibrium.

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Classical references are, for example, Keynes (1930), Demsetz (1968), Black (1971) or Glosten and Harris (1988).

See, for example, Conroy et al. (1990), Greene and Smart (1999), Bessembinder (2000) or Elyasiani et al. (2000).

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In cases where η → 0, the models are re-estimated using a generalized gamma distribution.

For ease of notation we omit the market-side specific index.

As both variables β_li and m _l are assumed to be unobservable, the definitions of factors and loadings are somewhat arbitrary. Here, we use a terminology which is consistent with the previous section and is commonly used in the literature of factor models. However, Härdle et al. (2009) use a converse terminology and define m _l as a factor and β_li as a factor loading.

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Title: Estimating Market Liquidity
Author: Professor Dr. Nikolaus Hautsch
Publisher: Springer Berlin Heidelberg
Book: Econometrics of Financial High-Frequency Data
Print ISBN: 978-3-642-21924-5

Electronic ISBN: 978-3-642-21925-2

Copyright Year: 2012
DOI: https://doi.org/10.1007/978-3-642-21925-2_9