The Budapest liquidity measure and the price impact function
During the 2007/2008 global economic crisis, market liquidity became an important issue both on the field of theoretical finance and in practice. In theory market liquidity is usually being modeled with price impact functions. In this study we show how the price impact function can be estimated from order book data. Our estimation is based on the Budapest Liquidity Measure (BLM) which is a liquidity measure that captures the transaction cost nature of liquidity. The main outcome of this paper is a method with which market participants can easily estimate price impact functions. This is of major importance, as the price impact function can be a useful tool during a dynamic portfolio optimization process. The price impact functions can help investors in their trading decisions.
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