Evaluating the Liquidity of Stocks using Transaction Data

Abstract

In recent years a substantial amount of literature in one way or another deals with liquidity. The interest in it grows beyond the walls of the academia, as the security exchanges recognize the importance of the concept and plan to adopt unique measures of liquidity and publish them in the regular reports. But as in literature, there is still no consensus as what liquidity really means and how it should be measured, or reported, understood or predicted, as the consistent summary of what the liquidity with a meaningful quantitative comparison is practically missing. In the present paper we try to gather and categorise the existent knowledge about liquidity and estimate the measures that can help to gain an idea of the liquidity generated on the transactions level at the stock market.We apply the existent knowledge of liquidity to market microstructure; establish and explain the links between spreads, size of the transactions and price movements and the actual time of the trade. This paper carries out the analysis of the validity of the liquidity measures and transaction based econometric models for five stocks of different trading intensity in order to see how the trading intensity influences the ability to estimate the dynamics of the price formation, information unravelling and evaluate the accuracy of the estimated models.