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Measuring market liquidity: An introductory survey

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  • A. Gabrielsen
  • M. Marzo
  • P. Zagaglia

Abstract

Asset liquidity in modern financial markets is a key but elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus delivering low costs of transaction. Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of assets. We consider definitions that stress the role of the bid-ask spread and the estimation of its components that arise from alternative sources of market friction. In this case, intra-daily measures of liquidity appear relevant for capturing the core features of a market, and for their ability to describe the arrival of new information to market participants.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp802.

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Date of creation: Dec 2011
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Handle: RePEc:bol:bodewp:wp802

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  1. Datar, Vinay T. & Y. Naik, Narayan & Radcliffe, Robert, 1998. "Liquidity and stock returns: An alternative test," Journal of Financial Markets, Elsevier, vol. 1(2), pages 203-219, August.
  2. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  3. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  4. McInish, Thomas H & Wood, Robert A, 1992. " An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-64, June.
  5. Hamilton, James L, 1979. "Marketplace Fragmentation, Competition, and the Efficiency of the Stock Exchange," Journal of Finance, American Finance Association, vol. 34(1), pages 171-87, March.
  6. Ananth Madhavan & Matthew Richardson & Mark Roomans, . "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Rodney L. White Center for Financial Research Working Papers 20-94, Wharton School Rodney L. White Center for Financial Research.
  7. Lo, Andrew W. & MacKinlay, A. Craig, 1989. "The size and power of the variance ratio test in finite samples : A Monte Carlo investigation," Journal of Econometrics, Elsevier, vol. 40(2), pages 203-238, February.
  8. Hasbrouck, Joel, 1993. "Assessing the Quality of a Security Market: A New Approach to Transaction-Cost Measurement," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 191-212.
  9. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  10. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
  11. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-56.
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Cited by:
  1. Gunther Capelle-Blancard & Olena Havrylchyk, 2014. "The Impact of the French Securities Transaction Tax on Market Liquidity and Volatility," EconomiX Working Papers 2014-27, University of Paris West - Nanterre la Défense, EconomiX.
  2. Anton Golub & Gregor Chliamovitch & Alexandre Dupuis & Bastien Chopard, 2014. "Multi-scale Representation of High Frequency Market Liquidity," Papers 1402.2198, arXiv.org.
  3. Caporin, Massimiliano & Ranaldo, Angelo & Velo, Gabriel G., 2013. "Stylized Facts and Dynamic Modeling of High-frequency Data on Precious Metals," Working Papers on Finance 1318, University of St. Gallen, School of Finance.
  4. Caporin, Massimiliano & Ranaldo, Angelo & Velo, Gabriel G., 2014. "Precious Metals Under the Microscope: A High-Frequency Analysis," Working Papers on Finance 1409, University of St. Gallen, School of Finance.

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