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Estimating liquidity using information on the multivariate trading process

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Author Info

  • Katarzyna Bien

    (Warsaw School of Economics)

  • Ingmar Nolte

    (University of Konstanz, CoFE)

  • Winfried Pohlmeier

    (University of Konstanz, CoFE, ZEW)

Abstract

In this paper we model the dynamic multivariate density of discrete bid and ask quote changes and their associated depths. We account for the contempo- raneous relationship between these trading marks by exploiting the concept of copula functions. Thereby we show how to model truncations of the mul- tivariate density in an easy way. A Metropolized-Independence Sampler is applied to draw from the dynamic multivariate density. The samples drawn serve to construct the dynamic density function of the quote slope liquidity measure, which enables us to quantify time varying liquidity risk. We analyze the influence of the decimalization at the NYSE on liquidity.

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Bibliographic Info

Paper provided by Department of Applied Econometrics, Warsaw School of Economics in its series Working Papers with number 10.

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Length: 74 pages
Date of creation: 22 May 2006
Date of revision:
Handle: RePEc:wse:wpaper:10

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Related research

Keywords: Liquidity; Copula Functions; Trading Process; Decimalization; Metropolized-Independence Sampler;

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References

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  1. Sugato Chakravarty & Robert A. Wood & Robert A. Van Ness, 2004. "Decimals And Liquidity: A Study Of The Nyse," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 27(1), pages 75-94.
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  3. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
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  7. Acharya, Viral V & Pedersen, Lasse Heje, 2003. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 3749, C.E.P.R. Discussion Papers.
  8. Sanford J. Grossman & Merton H. Miller, 1989. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
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  16. A. Colin Cameron & Tong Li & Pravin K. Trivedi & David M. Zimmer, 2004. "Modelling the differences in counted outcomes using bivariate copula models with application to mismeasured counts," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 566-584, December.
  17. Michaely, Roni & Vila, Jean-Luc, 1996. "Trading Volume with Private Valuation: Evidence from the Ex-dividend Day," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 471-509.
  18. Harris, Lawrence E, 1994. "Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 149-78.
  19. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March.
  20. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
  21. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
  22. Karpoff, Jonathan M, 1986. " A Theory of Trading Volume," Journal of Finance, American Finance Association, vol. 41(5), pages 1069-87, December.
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