Liquidity on the Budapest Stock Exchange 2007-2010

Abstract:     
The Budapest Liquidity Measure (BLM) was created by the Budapest Stock Exchange (BSE) in 2005 to provide the market with a simple index which assists market participants in making investment decisions by showing how liquid the single securities and the entire market is at the moment. Liquidity is calculated as the sum of the adverse price movement created by the transaction of the investors and the liquidity premium to be paid for the transaction. These two factors together are also referred to as the implicit cost or indirect cost of trading. The extent of this cost depends on the current state of the order book. Trading also incurs explicit or direct costs, e.g. brokerage fees and commissions, stock exchange fees and taxes (Kutas-Végh [2005]). These costs are not included in the BLM as these can easily be identified and quantified, and the aim of the BLM is to measure the effect of implicit costs not measured earlier. Our study presents the methodology of the BLM and compares it to the other liquidity proxies used in the market.

Number of Pages in PDF File: 21

Keywords: liquidity of financial markets, Budapest Stock Exchange

JEL Classification: G14, G15

working papers series