Convenient liquidity measure for Financial markets

2014/12/16 by Oleh Danyliv, Danyliv, Oleh, Bruce Bland +3
Economics, Econometrics and Finance · #FOS: Economics and business #Trading and Market Microstructure (q-fin.TR) #q-fin.TR

paper · pdf · doi:10.48550/arxiv.1412.5072

arxiv created 2014/12/16 · arxiv updated 2014/12/17

Abstract

A liquidity measure based on consideration and price range is proposed. Initially defined for daily data, Liquidity Index (LIX) can also be estimated via intraday data by using a time scaling mechanism. The link between LIX and the liquidity measure based on weighted average bid-ask spread is established. Using this liquidity measure, an elementary liquidity algebra is possible: from the estimation of the execution cost, the liquidity of a basket of instruments is obtained. A formula for the liquidity of an ETF, from the liquidity of its constituencies and the liquidity of ETF shares, is derived.

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