Market liquidity as dynamic factors
Hallin, Marc Mathias, Charles Pirotte, Hugues Veredas, David
Hallin, Marc
Mathias, Charles
Pirotte, Hugues
Veredas, David
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Publication Type
Journal article
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Supervisor
Publication Year
2011
Journal
Journal of Econometrics
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Publication Volume
163
Publication Issue
1
Publication Begin page
42
Publication End page
50
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Abstract
We use recent results on the Generalized Dynamic Factor Model (GDFM) with block structure to provide a data-driven definition of unobservable market liquidity and to assess the complementarity of two observed liquidity measures: daily close relative spreads and daily traded volumes for a sample of 426 S&P500 constituents recorded over the years 2004–2006. The advantage of defining market liquidity as a dynamic factor is that, contrary to other definitions, it tackles time dependence and commonness at the same time, without making any restrictive assumptions. 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.
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Keywords
Accounting & Finance