High Frequency Market Microstructure Noise Estimates and Liquidity Measures
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We provide a synthesis of the empirical liquidity market measure microstructure on market liquidity. The liquidity measurement literature has established standard measures of liquidity that apply to broad categories of market microstructure data. Specialized measures of liquidity have been developed to deal with data limitations in specific markets, to provide proxies from daily data, and to assess institutional trading programs.
The general liquidity literature has established local cross-sectional patterns, global cross-sectional patterns, and time-series patterns. Commonality in liquidity is liquidity market measure microstructure. Certain exchange designs enhance market liquidity: Automatic execution increases speed, but increases spreads. A tick size reduction yields a large improvement in liquidity. Providing ex-post transparency to an otherwise opaque market dramatically improves liquidity.
Opening up the limit order book improves liquidity. Regulatory reforms that increase the liquidity market measure microstructure of competitive alternatives, move toward linking them up, and level the playing field between exchanges improves liquidity.
High-frequency traders trade in both a passive, liquidity-supplying manner and an aggressive, liquidity-demanding manner. Their liquidity market measure microstructure impact improves both liquidity and price efficiency, but concerns remain regarding occasional trading glitches, order anticipation strategies, and latency arbitrage at the expense of slow traders.
The liquidity and corporate finance literature provides abundant evidence that liquidity is beneficial in many corporate settings: Further, the influence goes both ways. There is evidence that firms influence their own liquidity through a broad range of corporate decisions including internal governance standards, equity issuance form and pricing, share repurchases, acquisition targets, and disclosure timeliness and quality. The literature on liquidity and asset pricing demonstrates that both average liquidity cost and liquidity risk are priced, liquidity enhances market efficiency, and liquidity market measure microstructure strengthens the arbitrage linkage between related markets.
We conclude with directions for future research. The Empirical Analysis of Liquidity starts with an overview of how liquidity is measured and specialized issues in liquidity measurement. Next, it examines what is liquidity market measure microstructure about cross-sectional and timeseries patterns in liquidity.
The authors then review how liquidity relates to the corporate finance literature, including governance, executive compensation, capital structure, and payout policy. They also review how liquidity influences the asset pricing literature, including return differentials due to average liquidity cost, liquidity premia for systematic liquidity risks, the impact of liquidity on market efficiency, and the impact of liquidity on the law of one price.
Finally, some open questions and opportunities for future research are discussed. The Empirical Analysis of Liquidity is organized as follows. Section 2 considers the approaches taken to measure liquidity. Section 3 considers cross-sectional and time-series patterns in liquidity, commonality it liquidity, the impact of exchange design, the impact of exogenous policy shifts on liquidity, and the impact of high-frequency traders. Section 4 analyzes the relation between liquidity and corporate financial decisions.
Section 5 explores the impact of liquidity on asset pricing, and Section 6 concludes with directions for future research. Home Subjects Journals Books Packages. Export citation Select the format to use for exporting the citation. Download article In this article: Abstract We provide a synthesis of the empirical evidence on market liquidity. The Empirical Analysis of Liquidity The Empirical Analysis of Liquidity starts with an overview of how liquidity is liquidity market measure microstructure and specialized issues in liquidity measurement.
