Publication: BLM: bidimensional approach to measure liquidity
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2000-07
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Abstract
In a continuous trading market, taking efficiency as given, VarIatIOns in liquidity can be
measured by simultaneous changes in both immediacy costs and depth. Past theoretical and
empirical microstructure literature has been, however, one-dimensional. This paper introduces
a liquidity measure called BLM, specially designed for time-series analyses, that captures
simultaneous changes in both liquidity dimensions and provides a simple solution to deal with
those situations in which the change in immediacy costs and depth does not lead to an
unambiguous shift in liquidity. Using data from the NYSE, it is evidenced that this measure
captures short-term liquidity dynamics that cannot be captured by one-dimensional proxies of
liquidity. This measure is applied to the study of how liquidity reacts to changes in the market
conditions. It is shown that only volatility shifts have an unambiguous effect on liquidity
independently of the trading hour.