Liquidity Premium, Liquidity-Adjusted Return and Volatility, and Extreme Liquidity

2023/06/27 by Deng, Qi, Zhou, Zhong-guo
#Computational Finance (q-fin.CP) #FOS: Economics and business #General Finance (q-fin.GN) #Portfolio Management (q-fin.PM) #Risk Management (q-fin.RM) #Statistical Finance (q-fin.ST)

paper · doi:10.48550/arxiv.2306.15807

Abstract

We establish innovative liquidity premium measures, and construct liquidity-adjusted return and volatility to model assets with extreme liquidity, represented by a portfolio of selected crypto assets, and upon which we develop a set of liquidity-adjusted ARMA-GARCH/EGARCH models. We demonstrate that these models produce superior predictability at extreme liquidity to their traditional counterparts. We provide empirical support by comparing the performances of a series of Mean Variance portfolios.

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