This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Market Liquidity as Dynamic Factors

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Marc Hallin
Charles Mathias
Hugues Pirotte
David Veredas

Additional information is available for the following registered author(s):

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.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.ecares.org/index2.php?option=com_docman&task=doc_view&gid=60&Itemid=204
File Format: application/pdf
File Function: First version, 2009
Download Restriction: no

Publisher Info
Paper provided by Université Libre de Bruxelles, Ecares in its series ECARES Working Papers with number 2009_004.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 22 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:eca:wpaper:2009_004

Contact details of provider:
Postal: Av. F.D., Roosevelt, 39, 1050 Bruxelles
Phone: (32 2) 650 30 75
Fax: (32 2) 650 44 75
Web page: http://www.ecares.org/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Maurizio Zanardi).

Related research
Keywords: Commonality; liquidity; equities; factor models; block structure;

Other versions of this item:

Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November. [Downloadable!] (restricted)
    Other versions:
  2. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December. [Downloadable!] (restricted)
  3. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2004. "The generalized dynamic factor model consistency and rates," Journal of Econometrics, Elsevier, vol. 119(2), pages 231-255, April. [Downloadable!] (restricted)
  4. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August. [Downloadable!] (restricted)
    Other versions:
  5. Marc Hallin & Roman Liska, 2008. "Dynamic Factors in the Presence of Block Structure," ECARES Working Papers 2008_012, Université Libre de Bruxelles, Ecares. [Downloadable!]
    Other versions:
  6. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  7. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December. [Downloadable!]
    Other versions:
  8. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January. [Downloadable!] (restricted)
  9. Martinez, Miguel A. & Nieto, Belen & Rubio, Gonzalo & Tapia, Mikel, 2005. "Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 81-103. [Downloadable!] (restricted)
  10. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December. [Downloadable!] (restricted)
  11. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2005. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 830-840, September. [Downloadable!] (restricted)
    Other versions:
  12. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June. [Downloadable!] (restricted)
    Other versions:
  13. Korajczyk, Robert A. & Sadka, Ronnie, 2008. "Pricing the commonality across alternative measures of liquidity," Journal of Financial Economics, Elsevier, vol. 87(1), pages 45-72, January. [Downloadable!] (restricted)
  14. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Björn Hagströmer & Richard G. Anderson & Jane M. Binner & Birger Nilsson, 2009. "Dynamics in systematic liquidity," Working Papers 2009-025, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? The RePEc project started in 1997. Its precursor, NetEc, dates back to 1993.

This page was last updated on 2009-11-8.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.