Do Liquidity Proxies Based on Daily Prices and Quotes Really Measure Liquidity?
This paper examines whether liquidity proxies based on different daily prices and quotes approximate latent liquidity. We compare percent-cost daily liquidity proxies with liquidity benchmarks as well as with realized variance estimates. Both benchmarks and volatility measures are obtained from high...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2020-07-01
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| Series: | Entropy |
| Subjects: | |
| Online Access: | https://www.mdpi.com/1099-4300/22/7/783 |
| Summary: | This paper examines whether liquidity proxies based on different daily prices and quotes approximate latent liquidity. We compare percent-cost daily liquidity proxies with liquidity benchmarks as well as with realized variance estimates. Both benchmarks and volatility measures are obtained from high-frequency data. Our results show that liquidity proxies based on high-low-open-close prices are more correlated and display higher mutual information with volatility estimates than with liquidity benchmarks. The only percent-cost proxy that indicates higher dependency with liquidity benchmarks than with volatility estimates is the Closing Quoted Spread based on the last bid and ask quotes within a day. We consider different sampling frequencies for calculating realized variance and liquidity benchmarks, and find that our results are robust to it. |
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| ISSN: | 1099-4300 |