Zooming in on Liquidity
36 Pages Posted: 1 Jul 2004
Date Written: February 2004
In this paper we use the Exchange Liquidity Measure (XLM) to investigate into the time dimension of liquidity. The XLM(V) measures the cost of a roundtrip trade of size V. Besides a descriptive analysis we present the results of intraday event studies. Our objective is to measure how a liquidity shock affects the XLM measure, and how long it takes for the XLM measure to revert to a normal level. We analyze two sets of liquidity shocks, namely, large transactions and company-specific Bloomberg ticker news items. Applying the methodology to a sample of German stocks we find that resiliency after large transactions is high, i.e., liquidity quickly reverts to normal levels. We further document that large transactions are timed. The Bloomberg ticker news items do not have a discernible effect on liquidity.
Keywords: Liquidity, intraday event study, resiliency
JEL Classification: G10
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