NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market

Robert F. Engle, Joe Lange

NBER Working Paper No. 6129
Issued in August 1997
NBER Program(s):   AP

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.

download in pdf format
   (812 K)

email paper

This paper is available as PDF (812 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6129

Users who downloaded this paper also downloaded these:
Pastor and Stambaugh w8462 Liquidity Risk and Expected Stock Returns
Levine and Schmukler w11894 Internationalization and Stock Market Liquidity
Aït-Sahalia and Yu w13825 High Frequency Market Microstructure Noise Estimates and Liquidity Measures
Engle w5816 The Econometrics of Ultra-High Frequency Data
Choi and Cook Stock Market Liquidity and the Macroeconomy: Evidence from Japan
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us