Measuring market liquidity: An introductory survey

Alexandros Gabrielsen; Massimiliano Marzo; Paolo Zagaglia

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arXiv · 1112.6169

Measuring market liquidity: An introductory survey

Alexandros Gabrielsen·Massimiliano Marzo·Paolo Zagaglia

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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.

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Alexandros Gabrielsen, Massimiliano Marzo, Paolo Zagaglia. 2011-12-28. Measuring market liquidity: An introductory survey. https://arxiv.org/abs/1112.6169

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