Convenient Liquidity Measure for Financial Markets
14 Pages Posted: 29 Jan 2014 Last revised: 14 Aug 2014
Date Written: January 27, 2014
A liquidity measure based on consideration and price range is proposed. Initially defined for daily data, Liquidity Index (LIX) can also be estimated via intraday data by using a time scaling mechanism. The link between LIX and the liquidity measure based on weighted average bid-ask spread is established.
Using this liquidity measure, an elementary liquidity algebra is possible: from the estimation of the execution cost, the liquidity of a basket of instruments is obtained. A formula for the liquidity of an ETF, from the liquidity of its constituencies and the liquidity of ETF shares, is derived.
Keywords: measuring liquidity, portfolio liquidity
JEL Classification: G11, G12
Suggested Citation: Suggested Citation