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

54 Pages Posted: 3 Nov 2008

See all articles by Sriketan Mahanti

Sriketan Mahanti

State Street Global Markets

Amrut J. Nashikkar

New York University (NYU) - Department of Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

George Chacko

Santa Clara University - Finance Department

Gaurav Mallik

State Street Global Markets

Date Written: November 2006

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, where the weights are the fractional investor holdings. It can be used to measure liquidity in markets with sparse transactions data. This measure exhibits relationships with bond characteristics similar to those of other trade-based measures. 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.

Suggested Citation

Mahanti, Sriketan and Nashikkar, Amrut J. and Subrahmanyam, Marti G. and Chacko, George and Mallik, Gaurav, Latent Liquidity: A New Measure of Liquidity, with an Application to Corporate Bonds (November 2006). NYU Working Paper No. FIN-06-024, Available at SSRN: https://ssrn.com/abstract=1293650

Sriketan Mahanti

State Street Global Markets ( email )

One Lincoln Street
Boston, MA 02111-2900

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 G. Subrahmanyam

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

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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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