MARKET PRICE OF TRADING LIQUIDITY RISK AND MARKET DEPTH

Masaaki Kijima () and Christopher Ting
Additional contact information
Masaaki Kijima: School of Informatics and Data Science, Hiroshima University, 1-4-1, Kagamiyama, Higashi-Hiroshima 739-8527, Japan
Christopher Ting: School of Informatics and Data Science, Hiroshima University, 1-4-1, Kagamiyama, Higashi-Hiroshima 739-8527, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 08, 1-36

Abstract: Price impact of a trade is an important element in pre-trade and post-trade analyses. We introduce a framework to analyze the market price of liquidity risk, which allows us to derive an inhomogeneous Bernoulli ordinary differential equation. We obtain two closed form solutions, one of which reproduces the linear function of the order flow in Kyle (1985) for informed traders. However, when traders are not as asymmetrically informed, an S-shape function of the order flow is obtained. We perform an empirical intra-day analysis on Nikkei futures to quantify the price impact of order flow and compare our results with industry’s heuristic price impact functions. Our model of order flow yields a rich framework to not only estimate the liquidity risk parameters, but also to provide a plausible cause of why volatility and correlation are stochastic in nature. Finally, we find that the market depth encapsulates the market price of liquidity risk.

Keywords: Price impact; order flow; market price of risk; market microstructure (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.worldscientific.com/doi/abs/10.1142/S0219024919500456
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:22:y:2019:i:08:n:s0219024919500456

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024919500456

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().