Market Liquidity as Dynamic Factors

21 Pages Posted: 2 Feb 2009 Last revised: 1 Nov 2009

Marc Hallin

ECARES, Universite Libre de Bruxelles

Hugues Pirotte

Université Libre de Bruxelles - Solvay Brussels School of Economics and Management

Charles Mathias

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management

David Veredas

Vlerick Business School

Date Written: January 1, 2009

Abstract

We study market liquidity via daily close relative spreads and daily traded volumes in a sample of 426 S&P500 constituents recorded over the years 2004-2006, a period of "normal" liquidity conditions. We use recent results on the Generalized Dynamic Factor Model (GDFM) with block structure to provide a sound definition of unobservable market liquidity and to assess the complementarity of those two liquidity measures. The advantage of defining market liquidity as dynamic factors is that, contrary to other definitions that can be found in the literature, it tackles time dependence and commonness at the same time, without making any restrictive assumptions on the underlying data generating process. Both relative spread and volume in the dataset under study appear to be driven by the same one-dimensional common shocks, which therefore naturally qualify as the unobservable market liquidity shocks.

Keywords: Commonality, liquidity, equities, factor models, block structure

JEL Classification: C33, C51, G10

Suggested Citation

Hallin, Marc and Pirotte, Hugues and Mathias, Charles and Veredas, David, Market Liquidity as Dynamic Factors (January 1, 2009). Available at SSRN: https://ssrn.com/abstract=1336223 or http://dx.doi.org/10.2139/ssrn.1336223

Marc Hallin

ECARES, Universite Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 5886 (Phone)
+32 2 650 5899 (Fax)

Hugues Pirotte

Université Libre de Bruxelles - Solvay Brussels School of Economics and Management ( email )

50 Avenue Roosevelt
CP 145/01
Brussels 1050
Belgium
+32 2 650 65 21 (Phone)
+32 2 650 41 88 (Fax)

HOME PAGE: http://www.solvay.edu/cours/pirotte

Charles Mathias

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management ( email )

19 Av Franklin Roosevelt
Brussels, 1050
Belgium
+32 2 650 41 33 (Phone)
+32 2 650 44 75 (Fax)

David Veredas (Contact Author)

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

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