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Market Liquidity Estimation in a High-Frequency Setup

Author

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  • Kujtim Avdiu

    (Department of Statstics, Oesterreichische Nationalbank (OeNB), Otto-Wagner-Platz 3, 1090 Vienna, Austria)

Abstract

This article deals with the identification of a superior forecasting method for market liquidity using a calibrated Heston model for the bid/ask price path simulation instead of a standard Brownian motion, as well as a compound Poisson process and inverse transform sampling for the generation of the bid/ask volume distribution. We show that the simulated trading volumes converge to one single value, which can be used as a liquidity estimator, and find that the calibrated Heston model as well as the inverse transform sampling are superior to both the use of standard Brownian motion and compound Poisson process.

Suggested Citation

  • Kujtim Avdiu, 2023. "Market Liquidity Estimation in a High-Frequency Setup," JRFM, MDPI, vol. 16(9), pages 1-26, September.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:9:p:415-:d:1243362
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    References listed on IDEAS

    as
    1. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    2. Dilip B. Madan & Sofie Reyners & Wim Schoutens, 2019. "Advanced model calibration on bitcoin options," Digital Finance, Springer, vol. 1(1), pages 117-137, November.
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