Realized Illiquidity

Demetrio Lacava, Angelo Ranaldo and Paolo Santucci de Magistris
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Demetrio Lacava: University of Messina - Department of Economics
Paolo Santucci de Magistris: Luiss University of Rome

No 22-90, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study the theoretical and empirical properties of a simple measure of market illiquidity, namely the realized Amihud, which is defined as the ratio between the realized volatility and trading volume and which refines the popular price impact measure proposed by Amihud (2002). In our model, both price volatility and market liquidity are assumed to follow stochastic processes in continuous time. In this setting, characterized by stochastic volatility and liquidity, we prove that the realized Amihud provides a precise measurement of the inverse of integrated liquidity over fixed-length periods (e.g., a day, a week, a month). We consider a number of alternative econometric specifications, hence highlighting the main dynamic and distributional properties of the realized Amihud, including jumps, clustering, and leverage effects.

Keywords: Liquidity; Stochastic Volatility; Trading Volume; Amihud; Jumps (search for similar items in EconPapers)
JEL-codes: C15 F31 G12 G15 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-11
New Economics Papers: this item is included in nep-mst and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2290

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