The Best in Town: A Comparative Analysis of Low-Frequency Liquidity Estimators

Abstract

In this paper we conduct the most comprehensive comparative analysis of low-frequency liquidity measures so far. We review a large number of estimators and use a broad range of procedures to evaluate them. We find that the performance of the estimators is highly dependent on the particular application, and that no single best estimator exists. Against this background, we further analyze which firm characteristics determine the accuracy of the low-frequency estimators, we analyze whether a composite low-frequency estimator can outperform the best individual measures, and we analyze whether changes in the trading protocol (such as a reduction of the minimum tick size or the introduction of NYSE Open Book and NYSE Hybrid) affect the performance of the low-frequency estimators. Our ultimate objective is to guide researchers in their search for the right measure for a particular application.

Keywords: liquidity, transaction costs, bid-ask spread, price impact

JEL Classification: C58, G10, G19