Systemwide Commonalities in Market Liquidity

Mark Flood, John C. Liechty () and Thomas Piontek ()
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John C. Liechty: Pennsylvania State University
Thomas Piontek: Office of Financial Research

No 15-11, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: We explore statistical commonalities among granular measures of market liquidity with the goal of illuminating systemwide patterns in aggregate liquidity. We calculate daily invariant price impacts described by Kyle and Obizhaeva [2016] to assemble a granular panel of liquidity measures for equity, corporate bond, and futures markets. We estimate Bayesian models of hidden Markov chains and use Markov chain Monte Carlo analysis to measure the latent structure governing liquidity at the systemwide level. Three latent liquidity regimes -- high, medium, and low price-impact -- are adequate to describe each of the markets. Focusing on the equities subpanel, we test whether a collection of systemwide market summaries can recover the estimated liquidity dynamics. This version of the model allows an economically meaningful attribution of the latent liquidity states and yields meaningful predictions of liquidity disruptions as far as 15 trading days in advance of the 2008 financial crisis.

Keywords: Market Liquidity; Liquidity Measures; Liquidity Regimes; hidden Markov chains; Markov chain Monte Carlo; Systemwide Patterns of Aggregate Liquidity (search for similar items in EconPapers)
Pages: 78 pages
Date: 2015-05-28, Revised 2016-12-14
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Citations: View citations in EconPapers (2)

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