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On the bi-dimensionality of liquidity

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Author Info
Roberto Pascual
Alvaro Escribano
Mikel Tapia

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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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Publisher Info
Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 10 (2004)
Issue (Month): 6 (December)
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Raman Kumar & Atulya Sarin & Kuldeep Shastri, 1998. "The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 53(2), pages 717-732, 04. [Downloadable!] (restricted)
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  5. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March. [Downloadable!] (restricted)
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  6. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April. [Downloadable!] (restricted)
  7. Huberman, G. & Halka, D., 1999. "Systematic Liquidity," Papers 99-9, Columbia - Graduate School of Business.
  8. Michael A. Goldstein & Kenneth A. Kavajecz, . "Liquidity Provision during Circuit Breakers and Extreme Market Movements," Rodney L. White Center for Financial Research Working Papers 1-00, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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  9. Jones, Charles M. & Lipson, Marc L., 2001. "Sixteenths: direct evidence on institutional execution costs," Journal of Financial Economics, Elsevier, vol. 59(2), pages 253-278, February. [Downloadable!] (restricted)
  10. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June. [Downloadable!] (restricted)
  11. Petersen, Mitchell A. & Fialkowski, David, 1994. "Posted versus effective spreads *1: Good prices or bad quotes?," Journal of Financial Economics, Elsevier, vol. 35(3), pages 269-292, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Abad & José Yagüe & Sonia Sanabria, 2005. "Liquidity And Information Around Annual Earnings Announcements: An Intraday Analysis Of The Spanish Stock Market," Working Papers. Serie EC 2005-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  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). [Downloadable!]
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