Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market

24 Pages Posted: 24 Jul 2000 Last revised: 6 Apr 2008

See all articles by Joe Lange

Joe Lange

Cornerstone Research

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

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Date Written: August 1997

Abstract

The paper proposes a new measure, VNET, of market liquidity which directly measures the depth of the market. The measure is constructed from the excess volume of buys or sells during a market event defined by a price movement. As this measure varies over time, it can be forecast and explained. Using TORQ data, it is found that market depth varies positively but less than proportionally with past volume and negatively with the number of transactions. Both findings suggest that over time high volumes are associated with an influx of informed traders and reduce market liquidity. High expected volatility as measured by the ACD model of Engle and Russell (1995) and wide spreads both reduce expected depth. If the asymmetric trades are transacted in shorter than expected times, the costs will be greater giving an estimate of the value of patience.

Suggested Citation

Lange, Joe and Engle, Robert F., Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market (August 1997). NBER Working Paper No. w6129. Available at SSRN: https://ssrn.com/abstract=225894

Joe Lange

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Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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New York University (NYU) - Department of Finance

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