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The Budapest liquidity measure and the price impact function

Author

Listed:
  • Gyarmati, Ákos
  • Lublóy, Ágnes
  • Váradi, Kata

Abstract

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.

Suggested Citation

  • Gyarmati, Ákos & Lublóy, Ágnes & Váradi, Kata, 2012. "The Budapest liquidity measure and the price impact function," MPRA Paper 40339, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:40339
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    File URL: https://mpra.ub.uni-muenchen.de/40339/1/MPRA_paper_40339.pdf
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    References listed on IDEAS

    as
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      [Introduction of the Budapest Liquidity Mea
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    3. Challet, Damien & Stinchcombe, Robin, 2001. "Analyzing and modeling 1+1d markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 300(1), pages 285-299.
    4. 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.
    5. P. Weber & B. Rosenow, 2005. "Order book approach to price impact," Quantitative Finance, Taylor & Francis Journals, vol. 5(4), pages 357-364.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    market liquidity; price impact function; liquidity measure;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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