Market liquidity as dynamic factors

Marc Hallin, Charles Mathias, Hugues Pirotte Speder and David Veredas

No 163, 42-50, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: We study market liquidity via daily close relative spreads and daily traded volumes in a sample of 426 S&P500 constituents recorded over the years 2004-2006, a period of “normal” liquidity conditions. We use recent results on the Generalized Dynamic Factor Model (GDFM) with block structure to provide a sound definition of unobservable market liquidity and to assess the complementarity of those two liquidity measures. The advantage of defining market liquidity as dynamic factors is that, contrary to other definitions that can be found in the literature, it tackles time dependence and commonness at the same time, without making any restrictive assumptions on the underlying data generating process. Both relative spread and volume in the dataset under study appear to be driven by the same one-dimensional common shocks, which therefore naturally qualify as the unobservable market liquidity shocks.

Keywords: Commonality; liquidity; equities; factor models; block structure (search for similar items in EconPapers)
JEL-codes: C33 C51 G10 (search for similar items in EconPapers)
Pages: 22 p.
Date: 2011
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Citations: View citations in EconPapers (15)

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