Implied Liquidity - Towards Stochastic Liquidity Modeling and Liquidity Trading
José Manuel Corcuera
University of Barcelona - Faculty of Mathematics
Dilip B. Madan
University of Maryland - Robert H. Smith School of Business
KU Leuven - Department of Mathematics
October 15, 2010
In this paper the authors introduce the new concept of implied liquidity on the basis of the recent developed two-way price theory (conic finance). Implied liquidity isolates and quantifies in a fundamental way liquidity risk in financial markets. It is shown on real market option data on the major US indices how liquidity dried up in the troubled year end of 2008. These investigations open the door to stochastic liquidity modeling, liquidity derivatives and liquidity trading.
Number of Pages in PDF File: 11
Keywords: Liquidity, bid-ask pricing, conic finance
JEL Classification: C00working papers series
Date posted: February 14, 2011
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