On the Bi-Dimensionality of Liquidity

European Journal of Finance, 10, 6, 542-566 (2004)

37 Pages Posted: 4 Mar 2003 Last revised: 7 Oct 2014

See all articles by Roberto Pascual

Roberto Pascual

Universidad de las Islas Baleares

Álvaro Escribano

Universidad Carlos III de Madrid - Department of Economics

Mikel Tapia

University of the Basque Country

Date Written: October 1, 2002

Abstract

Variations in overall liquidity can be measured by simultaneous changes in both immediacy costs and depth. Liquidity changes, however, are ambiguous whenever both liquidity dimensions do not reinforce each other. In this paper, we characterize ambiguity using an instantaneous time-varying elasticity concept. We construct several bi-dimensional liquidity measures that cope with the ambiguity problem. First, we show that the bi-dimensional measures are superior since commonalities in overall liquidity cannot be fully explained by the common factors in the one-dimensional proxies of liquidity. Second, we show that an infinitesimal variation in either market volatility or trading activity augments the probability of observing an unambiguous liquidity adjustment. Ambiguity strongly negatively depends on the expected component of volatility.

Keywords: Liquidity, bi-dimensionality, ambiguity, volatility

JEL Classification: G1

Suggested Citation

Pascual Gascó, Roberto and Escribano, Álvaro and Tapia, Mikel, On the Bi-Dimensionality of Liquidity (October 1, 2002). European Journal of Finance, 10, 6, 542-566 (2004), Available at SSRN: https://ssrn.com/abstract=348861 or http://dx.doi.org/10.2139/ssrn.348861

Roberto Pascual Gascó (Contact Author)

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

Álvaro Escribano

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34-91 6249854 (Phone)
+34-91 6249329 (Fax)

HOME PAGE: http://www.eco.uc3m.es/english/staff/contact_info/

Mikel Tapia

University of the Basque Country

Faculty of Economics
Bilbao 48015
Spain

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