Proper Liquidity Measures

37 Pages Posted: 12 May 2018 Last revised: 20 Aug 2018

See all articles by Henrique Ramos

Henrique Ramos

Universidade Federal do Rio Grande do Sul (UFRGS)

Marcelo Righi

Universidade Federal do Rio Grande do Sul (UFRGS)

Date Written: April 8, 2018

Abstract

Liquidity is easily perceived but not easily defined in financial markets. In this study, we present a class of liquidity measures called Proper Liquidity Measures (PLM). We prove that widely used measure such as percent quoted spreads and the Amihud measure fulfill our axioms. PLMs can be composed from the ratio of Generalized Deviation Measures to Negotiability Variables. We analyze specific measures and propose PLMs on the basis of semi-deviations. Two empirical exercises test the performance of these measures: a) the relationship between liquidity and implied volatility and b) common factors in liquidity and tail risk. Applications provide both support for the use of PLM and new insights on liquidity.

Keywords: Generalized Deviation Measure, Liquidity, Implied Volatility, Tail Risk

JEL Classification: C65, G12, G32

Suggested Citation

Ramos, Henrique and Righi, Marcelo, Proper Liquidity Measures (April 8, 2018). Available at SSRN: https://ssrn.com/abstract=3158806 or http://dx.doi.org/10.2139/ssrn.3158806

Henrique Ramos (Contact Author)

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Av. Carlos Gomes 1111
Porto Alegre, Rio Grande do Sul 90480-004
Brazil

Marcelo Righi

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Washington Luis, 855
Porto Alegre, Rio Grande do Sul 90010-460
Brazil

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