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Dynamic Autoregressive Liquidity (DArLiQ)

Christian Hafner (), Oliver Linton () and Linqi Wang ()
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Linqi Wang: Université catholique de Louvain, LIDAM/LFIN, Belgium

No 2022002, LIDAM Discussion Papers LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: We introduce a new class of semiparametric dynamic autoregressive models forthe Amihud illiquidity measure, which captures both the long-run trend in the illiquidity series with a nonparametric component and the short-run dynamics with an autoregressive component. We develop a GMM estimator based on conditional moment restrictions and an efficient semiparametric ML estimator based on an iid assumption. We derive large sample properties for both estimators. We further develop a methodology to detect the occurrence of permanent and transitory breaks in the illiquidity process. Finally, we demonstrate the model performance and its empirical relevance on two applications. First, we study the impact of stock splits on the illiquidity dynamics of the five largest US technology company stocks. Second, we investigate how the different components of the illiquidity process obtained from our model relate to the stock market risk premium using data on the S&P 500 stock market index.

Keywords: Nonparametric; Semiparametric; Splits; Structural Change (search for similar items in EconPapers)
JEL-codes: C12 C14 (search for similar items in EconPapers)
Pages: 80
Date: 2022-02-23
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-ets, nep-mst and nep-ore
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Working Paper: Dynamic Autoregressive Liquidity (DArLiQ) (2022) Downloads
Working Paper: Dynamic Autoregressive Liquidity (DArLiQ) (2022) Downloads
Working Paper: Dynamic Autoregressive Liquidity (DArLiQ) (2022) Downloads
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