Measuring bond market liquidity: devising a composite aggregate liquidity score

Moorad Choudhry

Applied Financial Economics, 2010, vol. 20, issue 12, 955-973

Abstract: The importance of liquidity in financial markets is emphasized strongly in the academic literature. There is no single definition of liquidity, which can lead to confusion when attempting to measure liquidity levels. This problem is often solved through the use of proxy indicators such as the bid offer spread. No single measure is completely satisfactory, and the use of proxy measures renders comparison across markets difficult. Our objective is to devise a composite aggregate measure of liquidity that makes use of a range of market factors, and which is applicable to any financial market. For illustration, we consider the UK government bond market during 1993-2002, a period during which structural reform aimed at improving liquidity was undertaken. We devise a transparent, accessible and easy-to-implement method to measure liquidity level in a financial market, using an aggregate scoring system. This adopts a composite methodology, using components selected on the basis of their relative importance to promoting liquidity. Our measure suggests that market liquidity improved in the gilt market our observation period. Furthermore, the measurement methodology we propose may be employed as a practical tool by institutional investors to measure liquidity in any financial market, and enables them to make comparisons across different markets prior to making the investment decision.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603101003724281 (text/html)
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:taf:apfiec:v:20:y:2010:i:12:p:955-973

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603101003724281

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().