Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market / Robert F. Engle, Joe Lange.

Format:

Book

Author/Creator:

Engle, Robert F.

Contributor:

National Bureau of Economic Research.

Lange, Joe.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6129.

NBER working paper series no. w6129

Language:

English

Subjects (All):

Liquidity (Economics).

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Cambridge : National Bureau of Economic Research, 1997.

Summary:

The paper proposes a new measure, VNET, of market liquidity which directly measures the depth of the market. The measure is constructed from the excess volume of buys or sells during a market event defined by a price movement. As this measure varies over time, it can be forecast and explained. Using TORQ data, it is found that market depth varies positively but less than proportionally with past volume and negatively with the number of transactions. Both findings suggest that over time high volumes are associated with an influx of informed traders and reduce market liquidity. High expected volatility as measured by the ACD model of Engle and Russell (1995) and wide spreads both reduce expected depth. If the asymmetric trades are transacted in shorter than expected times, the costs will be greater giving an estimate of the value of patience.

Notes:

Print version record

August 1997.