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Systemwide Commonalities in Market Liquidity

Author

Listed:
  • Mark D. Flood

    (Office of Financial Research)

  • John C. Liechty

    (Office of Financial Research
    Pennsylvania State University)

  • Thomas Piontek

    (Office of Financial Research)

Abstract

We explore statistical commonalities among granular measures of market liquidity with the goal of illuminating systemwide patterns in aggregate liquidity. We calculate daily invariant price impacts described by Kyle and Obizhaeva [2016] to assemble a granular panel of liquidity measures for equity, corporate bond, and futures markets. We estimate Bayesian models of hidden Markov chains and use Markov chain Monte Carlo analysis to measure the latent structure governing liquidity at the systemwide level. Three latent liquidity regimes -- high, medium, and low price-impact -- are adequate to describe each of the markets. Focusing on the equities subpanel, we test whether a collection of systemwide market summaries can recover the estimated liquidity dynamics. This version of the model allows an economically meaningful attribution of the latent liquidity states and yields meaningful predictions of liquidity disruptions as far as 15 trading days in advance of the 2008 financial crisis.

Suggested Citation

  • Mark D. Flood & John C. Liechty & Thomas Piontek, 2015. "Systemwide Commonalities in Market Liquidity," Working Papers 15-11, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:wpaper:15-11
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    File URL: https://financialresearch.gov/working-papers/files/OFRwp-2015-11_Systemwide-Commonalities-in-Market-Liquidity.pdf
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    References listed on IDEAS

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