Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market

UCSD Economics Discussion Paper 97-12R

24 Pages Posted: 10 Feb 1998

See all articles by Joe Lange

Joe Lange

Cornerstone Research

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1997

Abstract

The paper proposes a new measure of market liquidity, VNET, which directly measures the depth of the market. VNET is constructed from the excess volume of buys or sells during a market event defined by a price movement. As this measure varies over time, it can be forecast and explained. Using NYSE TORQ data, it is found that market depth varies positively but less than proportionally with past volume and negatively with the number of transactions. Both findings suggest that over the day high volumes are associated with an influx of informed traders and reduce market liquidity. The timing of events plays an intimate role in the analysis. High expected volatility as measured by the ACD model of Engle and Russell (1997) reduces expected liquidity. Finally, market depth is smaller when the one-sided trading volume is transacted in a shorter than expected time, providing an estimate of the value of patience.

JEL Classification: G12, G14

Suggested Citation

Lange, Joe and Engle, Robert F., Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market (November 1997). UCSD Economics Discussion Paper 97-12R. Available at SSRN: https://ssrn.com/abstract=58278 or http://dx.doi.org/10.2139/ssrn.58278

Joe Lange

Cornerstone Research ( email )

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Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
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New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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