Latent Liquidity: A New Measure of Liquidity, with an Application Corporate Bonds

29 Pages Posted: 3 Nov 2008  

Sriketan Mahanti

affiliation not provided to SSRN

Amrut J. Nashikkar

New York University (NYU) - Department of Finance

Marti Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

George Chacko

Santa Clara University - Finance Department

Gaurav Mallik

State Street Global Markets

Date Written: November 2007

Abstract

We present a new measure of liquidity known as "latent liquidity" and apply it to a unique corporate bond database. Latent liquidity is defined as the weighted average turnover of investors who hold a bond, in which the weights are the fractional investor holdings. It can be used to measure liquidity in markets with sparse transactions data. For bonds that trade frequently, our measure has predictive power for both transaction costs and the price impact of trading, over and above trading activity and bond-specific characteristics thought to be related to liquidity. Additionally, this measure exhibits relationships with bond characteristics similar to those of other trade-based measures.

Keywords: Fixed Income, Corporate Bonds, Liquidity, Asset Pricing, Market Microstructure

Suggested Citation

Mahanti, Sriketan and Nashikkar, Amrut J. and Subrahmanyam, Marti and Chacko, George and Mallik, Gaurav, Latent Liquidity: A New Measure of Liquidity, with an Application Corporate Bonds (November 2007). NYU Working Paper No. FIN-07-012. Available at SSRN: https://ssrn.com/abstract=1293149

Sriketan Mahanti

affiliation not provided to SSRN ( email )

Amrut J. Nashikkar

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
+1-212-998-0718 (Phone)

HOME PAGE: http://pages.stern.nyu.edu/~anashikk

Marti Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

44 West 4th Street
New York, NY NY 10012
United States

George Chacko

Santa Clara University - Finance Department ( email )

Santa Clara, CA 95053
United States

Gaurav Mallik

State Street Global Markets ( email )

One Lincoln Street
Boston, MA 02111-2900
United States

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