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Realized Illiquidity

Author

Listed:
  • Demetrio Lacava

    (University of Messina - Department of Economics)

  • Angelo Ranaldo

    (University of St. Gallen; Swiss Finance Institute)

  • Paolo Santucci de Magistris

    (Luiss University of Rome)

Abstract

We study the theoretical and empirical properties of a simple measure of market illiquidity, namely the realized Amihud, which is defined as the ratio between the realized volatility and trading volume and which refines the popular price impact measure proposed by Amihud (2002). In our model, both price volatility and market liquidity are assumed to follow stochastic processes in continuous time. In this setting, characterized by stochastic volatility and liquidity, we prove that the realized Amihud provides a precise measurement of the inverse of integrated liquidity over fixed-length periods (e.g., a day, a week, a month). We consider a number of alternative econometric specifications, hence highlighting the main dynamic and distributional properties of the realized Amihud, including jumps, clustering, and leverage effects.

Suggested Citation

  • Demetrio Lacava & Angelo Ranaldo & Paolo Santucci de Magistris, 2022. "Realized Illiquidity," Swiss Finance Institute Research Paper Series 22-90, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2290
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    More about this item

    Keywords

    Liquidity; Stochastic Volatility; Trading Volume; Amihud; Jumps;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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