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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)

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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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File URL: http://www.sgh.waw.pl/instytuty/zes/wp/aewp03-06.pdf
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Publisher 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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Postal: 02-554 Warszawa, Al. Niepodległosci 164
Web page: http://www.sgh.waw.pl/instytuty/zes
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Related research
Keywords: Liquidity Copula Functions Trading Process Decimalization Metropolized-Independence Sampler

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
F30 - International Economics - - International Finance - - - General
C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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  1. Acharya, Viral V & Pedersen, Lasse Heje, 2004. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 4718, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Harris, Lawrence E, 1994. "Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(1), pages 149-78. [Downloadable!] (restricted)
  3. Engle, Robert F. & Lange, Joe, 2001. "Predicting VNET: A model of the dynamics of market depth," Journal of Financial Markets, Elsevier, vol. 4(2), pages 113-142, April. [Downloadable!] (restricted)
  4. Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000. "Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE," Journal of Financial Economics, Elsevier, vol. 56(1), pages 125-149, April. [Downloadable!] (restricted)
    Other versions:
  5. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
    Other versions:
  6. Michaely, Roni & Vila, Jean-Luc, 1996. "Trading Volume with Private Valuation: Evidence from the Ex-dividend Day," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 471-509. [Downloadable!] (restricted)
  7. Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, A. Craig, 1992. "An ordered probit analysis of transaction stock prices," Journal of Financial Economics, Elsevier, vol. 31(3), pages 319-379, June. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
  9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  10. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April. [Downloadable!] (restricted)
  11. Roman Liesenfeld & Ingmar Nolte & Winfried Pohlmeier, 2006. "Modelling financial transaction price movements: a dynamic integer count data model," Empirical Economics, Springer, vol. 30(4), pages 795-825, January. [Downloadable!] (restricted)
  12. Danielsson, J. & Payne, R., 2002. "Real trading patterns and prices in spot foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 203-222, April. [Downloadable!] (restricted)
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  13. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. 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. [Downloadable!] (restricted)
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