Benchmarking Liquidity Proxies: Accounting for Dynamics and Frequency Issues

46 Pages Posted: 6 Feb 2015

See all articles by Sven Langedijk

Sven Langedijk

European Union - European Commission; European Commission Joint Research Center

George Monokroussos

Joint Research Centre, Italy

Evangelia Papanagiotou

European Commission - Joint Research Centre

Date Written: January 1, 2015

Abstract

We revisit a central task of the extant liquidity literature, which is to identify effective measures of liquidity. We critically assess the influential practice of identifying the best liquidity measures based on monthly correlations by comparing and contrasting correlations between monthly and daily averages of high-frequency benchmarks and low-frequency proxies of liquidity, as well as by examining the coherences between such measures. Furthermore, we propose MIDAS regressions as a way of investigating the bilateral relationships between benchmarks and proxies without averaging out potentially valuable high-frequency information, as is common practice. We conclude that the empirical correlations between benchmarks and proxies in general become weaker as the frequency over which these relationships are examined becomes higher, and that standard practices may lead to misleading conclusions. One implication of our results is that any liquidity measure needs to be assessed against the relevant timeframe for conversion into cash.

Keywords: Liquidity, Market Microstructure, High-Frequency Data, Sovereign Bonds, MIDAS, Coherence.

JEL Classification: C58, G12, G28

Suggested Citation

Langedijk, Sven and Monokroussos, George and Papanagiotou, Evangelia, Benchmarking Liquidity Proxies: Accounting for Dynamics and Frequency Issues (January 1, 2015). Available at SSRN: https://ssrn.com/abstract=2560220 or http://dx.doi.org/10.2139/ssrn.2560220

Sven Langedijk

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

European Commission Joint Research Center ( email )

1049
Belgium

George Monokroussos (Contact Author)

Joint Research Centre, Italy ( email )

Via E. Fermi 1
I-21020 Ispra (VA)
Italy

Evangelia Papanagiotou

European Commission - Joint Research Centre ( email )

Brussels, B-1049
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
114
Abstract Views
536
rank
242,198
PlumX Metrics