Do Liquidity Proxies Based on Daily Prices and Quotes Really Measure Liquidity?

• Main Authors: Barbara Będowska-Sójka, Krzysztof Echaust
• Format: Article
• Language: English
• Published: MDPI AG 2020-07-01
• Series: Entropy
• Subjects: liquidity proxy; liquidity benchmark; volatility estimate; correlation coefficient; partial determination; mutual information
• Online Access: https://www.mdpi.com/1099-4300/22/7/783

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.