Journal article · 2020

What is the best proxy for liquidity in the presence of extreme illiquidity?

Będowska-Sójka, B., Echaust, K.

Emerging Markets Review, 43, 100695

DOI: 10.1016/j.ememar.2020.100695

Abstract

This paper aims to indicate the best daily proxy for unobserved liquidity in the presence of extreme movements on the market. We apply copulas to investigate the dependence between benchmarks based on intraday prices and proxies based on daily data. We focus on the tail dependence between both types of measures. Our results show that when the market experiences extreme illiquidity, the Closing Quoted Spread (CQS) based on daily closing bid and ask prices is superior to other percent-cost low-frequency proxies. We find the highest tail dependence coefficients for CQS and either the Percent Effective Spread or the Percent Quoted Spread.

Keywords: liquidity proxies, extreme illiquidity, low-frequency liquidity measures, bid-ask spread, Closing Quoted Spread, copulas, tail dependence, intraday data

Full text: see the publisher version via DOI.

Research topics: Market liquidity and its measurement

Funding

Cite

@article{emr2020_proxy,
  title = {What is the best proxy for liquidity in the presence of extreme illiquidity?},
  author = {Będowska-Sójka, B. and Echaust, K.},
  year = {2020},
  journal = {Emerging Markets Review},
  note = {43, 100695},
  doi = {10.1016/j.ememar.2020.100695}
}