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On the bi-dimensionality of liquidity

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Author Info

  • Roberto Pascual
  • Alvaro Escribano
  • Mikel Tapia

Abstract

Variations in overall liquidity can be measured by simultaneous changes in both immediacy costs and depth. Liquidity changes, however, are ambiguous whenever both liquidity dimensions do not reinforce each other. In this paper, ambiguity is characterized using an instantaneous time-varying elasticity concept. Several bi-dimensional liquidity measures that cope with the ambiguity problem are constructed. First, it is shown that bi-dimensional measures are superior since commonalities in overall liquidity cannot be fully explained by the common factors in one-dimensional proxies of liquidity. Second, it is shown that an infinitesimal variation in either market volatility or trading activity augments the probability of observing an unambiguous liquidity adjustment. Ambiguity strongly depends on the expected (deterministic) component of volatility.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470410001674323
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 10 (2004)
Issue (Month): 6 ()
Pages: 542-566

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Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:542-566

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Related research

Keywords: liquidity; measurement; immediacy; depth; elasticity; ambiguity; bi-dimensional;

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Cited by:
  1. Paresh Kumar Narayan & Zhichao Zhang & Xinwei Zheng, 2010. "Some Hypotheses on Commonality in Liquidity: New Evidence from the Chinese Stock Market," Economics Series 2010_10, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  2. PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," CORE Discussion Papers 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Kalaitzoglou, Iordanis & Ibrahim, Boulis M., 2013. "Does order flow in the European Carbon Futures Market reveal information?," Journal of Financial Markets, Elsevier, vol. 16(3), pages 604-635.

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