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Measuring Market Liquidity: An Introductory Survey

Author

Listed:
  • Alexandros Gabrielsen

    (Cass Business School)

  • Massimiliano Marzo

    (Department of Economics, Università di Bologna)

  • Paolo Zagaglia

    (Department of Economics, Università di Bologna)

Abstract

Asset liquidity in modern financial markets is a key but elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus delivering low costs of transaction. Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of assets. We consider definitions that stress the role of the bid-ask spread and the estimation of its components that arise from alternative sources of market friction. In this case, intra-daily measures of liquidity appear relevant for capturing the core features of a market, and for their ability to describe the arrival of new information to market participants.

Suggested Citation

  • Alexandros Gabrielsen & Massimiliano Marzo & Paolo Zagaglia, 2012. "Measuring Market Liquidity: An Introductory Survey," Working Paper series 02_12, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:02_12
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    References listed on IDEAS

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    More about this item

    Keywords

    market microstructure; liquidity risk; frictions; transaction costs;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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