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Measuring and Modelling the Market Liquidity of Stocks: Methods and Issues

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  • Alexandros Gabrielsen
  • Massimiliano Marzo
  • Paolo Zagaglia

Abstract

The liquidity of an asset in modern financial markets is a key and, yet, elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus delivering low costs of transaction. Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of stocks. We discuss definitions of market liquidity that stress the role of the bid-ask spread and the estimation of its components arising from alternative sources of market friction. In this case, measures of liquidity based on intra-daily data are relevant for capturing the core features of a market, and for their ability to account for the arrival of new information.

Suggested Citation

  • Alexandros Gabrielsen & Massimiliano Marzo & Paolo Zagaglia, 2012. "Measuring and Modelling the Market Liquidity of Stocks: Methods and Issues," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 1(4), pages 1-8.
    • Handle: RePEc:spt:fininv:v:1:y:2012:i:4:f:1_4_8
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    Cited by:

    1. Baviera, Roberto & Nassigh, Aldo & Nastasi, Emanuele, 2021. "A closed formula for illiquid corporate bonds and an application to the European market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).

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