On the Usefulness of Intraday Price Ranges to Gauge Liquidity in Cap-Based Portfolios

Abstract

We investigate how informative is price dynamics to estimate contemporaneous intraday liquidity on Euronext for three market capitalization classes: small, mid, and large caps. Liquidity is measured by a comprehensive set of both book-based and trade-based proxies. Price dynamics is captured by studying price movements between high, low, opening, and closing prices. While controlling for trading activity and realized volatility, we estimate the relation between liquidity and price movements by applying OLS with clustered standard errors, robust and median regression techniques. We show that liquidity and price dynamics are closely related. For example, the intensity in the price discovery process and the level of (relative) price uncertainty are clearly associated with lower liquidity. Easy-to-observe price movements are found to be particularly useful when it comes to efficiently evaluating the level of liquidity on the stock market.

Keywords: Liquidity, Price Dynamics, Intraday, Panel

JEL Classification: G10, G14