Assessing the Risk of Liquidity Suppliers on the Basis of Excess Demand Intensities

Nikolaus Hautsch

Journal of Financial Econometrics, 2003, vol. 1, issue 2, 189-215

Abstract: In this article we introduce the concept of excess volume durations, which are defined as the time until a given amount of buy or sell excess volume is traded on the market. Excess volume durations indicate the one-sided intensity of liquidity demand and characterize the risk of a market maker with respect to asymmetric information and inventory problems. By modeling excess volume durations based on Box--Cox-type autoregressive conditional duration (ACD) models, it is shown that market microstructure variables are predictors for the expected liquidity demand intensity. Moreover, the length of excess volume durations is found to be positively correlated with the magnitude of the corresponding price impact and thus the market depth. , .

Date: 2003
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