Market Liquidity Estimation in a High-Frequency Setup

Kujtim Avdiu ()
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Kujtim Avdiu: Department of Statstics, Oesterreichische Nationalbank (OeNB), Otto-Wagner-Platz 3, 1090 Vienna, Austria

JRFM, 2023, vol. 16, issue 9, 1-26

Abstract: This article deals with the identification of a superior forecasting method for market liquidity using a calibrated Heston model for the bid/ask price path simulation instead of a standard Brownian motion, as well as a compound Poisson process and inverse transform sampling for the generation of the bid/ask volume distribution. We show that the simulated trading volumes converge to one single value, which can be used as a liquidity estimator, and find that the calibrated Heston model as well as the inverse transform sampling are superior to both the use of standard Brownian motion and compound Poisson process.

Keywords: market liquidity; Heston model; geometric Brownian motion; calibration; optimization techniques; compound Poisson process; inverse transformation sampling (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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