A Model of Stochastic Liquidity

54 Pages Posted: 6 Jun 2003 Last revised: 29 Jan 2014

See all articles by Masahiro Watanabe

Masahiro Watanabe

University of Alberta - School of Business; University of Alberta - Department of Finance and Statistical Analysis

Date Written: January 21, 2014

Abstract

This paper proposes a dynamic multi-security model in which liquidity reflects stochastic variation, persistence, and commonality of underlying information variance. Illiquidity, price-change variance, and trading volume all increase in the size of information. Using high frequency data, I perform structural estimation of the model by Bayesian Markov-Chain Monte-Carlo simulation, with the conditional volatility of underlying information modeled as stochastic volatility or realized volatility controlling for microstructure noise. I find that a Dow stock's liquidity decreases in the size of information about not only itself but also about other Dow stocks, demonstrating a significant cross-sectional effect of information on liquidity.

Keywords: Kyle model, liquidity, stochastic and realized volatility, Bayesian Markov-Chain Monte-Carlo (MCMC), GARCH, trading volume

JEL Classification: G12, G14

Suggested Citation

Watanabe, Masahiro, A Model of Stochastic Liquidity (January 21, 2014). Yale ICF Working Paper No. 03-18; EFA 2003 Glasgow Annual Conference Paper. Available at SSRN: https://ssrn.com/abstract=413983

Masahiro Watanabe (Contact Author)

University of Alberta - School of Business ( email )

School of Business - FMS
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-7343 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.ualberta.ca/~masa/

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
1,326
Abstract Views
6,371
rank
13,888
PlumX Metrics