Designing High-Frequency Market Liquidity Measures with Applications to Monetary Policy

Z. Merrick Li, Oliver B. Linton, Yunxiao Zhai and Haotian Zhang

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We propose a new family of liquidity measures—including order imbalance metrics—based on the dispersion and persistence of transitory gaps between transaction prices and the underlying efficient price. We devise an estimation method that renders these latent gaps observable, allowing plug-in estimates of the new measures from intraday trades alone, along with an inference method that allows us to quantify the sampling uncertainty in our estimates. We apply the approach to the S&P 500 equity portfolio, as well as to individual stocks. We use event study methodology to capture heterogeneous liquidity responses to FOMC announcements, which reveals distinct order-persistence patterns on surprise versus non-surprise days, highlighting how markets anticipate and react to monetary policy via the liquidity channel.

Keywords: Market liquidity; FOMC Announcements; Spot Estimation; Monetary Policy Surprises; Order Imbalance; High-Frequency Identification (search for similar items in EconPapers)
Date: 2026-01-18
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2639

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