Implied Liquidity: Model Sensitivity

32 Pages Posted: 10 Nov 2012

See all articles by Florence Guillaume

Florence Guillaume

Independent

Wim Schoutens

KU Leuven - Department of Mathematics

Hansjoerg Albrecher

University of Lausanne; Swiss Finance Institute

Date Written: April 24, 2012

Abstract

The concept of implied liquidity originates from the conic finance theory and more precisely from the law of two prices where market participants buy from the market at the ask price and sell to the market at the lower bid price. The implied liquidity lambda of any financial instrument is determined such that both model prices fit as well as possible the bid and ask market quotes. It reflects the liquidity of the financial instrument: the lower the lambda, the higher the liquidity. The aim of this paper is to study the evolution of the implied liquidity pre- and post crisis under a wide range of models and to study implied liquidity time series which could give insight for future stochastic liquidity modelling. In particular, we perform a maximum likelihood estimation of the CIR and Vasicek mean-reverting processes applied to liquidity and volatility time series. The results show that implied liquidity is far less persistent than implied volatility. Moreover, a comparison of the parameter estimates between the pre- and post credit crisis periods indicates that liquidity tends to decrease and increase for long and short term options, respectively, during troubled periods.

Keywords: implied liquidity, conic finance, model sensitivity, pre-and post crisis liquidity

JEL Classification: C00

Suggested Citation

Guillaume, Florence and Schoutens, Wim and Albrecher, Hansjoerg, Implied Liquidity: Model Sensitivity (April 24, 2012). Available at SSRN: https://ssrn.com/abstract=2173227 or http://dx.doi.org/10.2139/ssrn.2173227

Florence Guillaume (Contact Author)

Independent ( email )

No Address Available
United States

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Hansjoerg Albrecher

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
142
Abstract Views
776
rank
214,601
PlumX Metrics