How Do You Capture Liquidity? A Review of the Literature on Low‐frequency Stock Liquidity

Abstract

Researchers have various ways to measure liquidity but most of them come with both merits and demerits. This study provides a literature review of low-frequency liquidity measures with a primary focus on liquidity measurement as well as its implication on asset pricing. Based on the dimension it captures, a range of existing low-frequency measures are divided into four categories of liquidity proxies including transaction cost, volume, price impact, and multidimensionbased measures. We review some well-established liquidity proxies, a new bid-ask spread estimator and price impact ratios proposed recently. Finally, we discuss how good low-frequency liquidity measures are at capturing standard liquidity benchmarks, which are constructed from high-frequency intraday data.

Market Liquidity and Its Dimensions: Linking the Liquidity Dimensions to Sentiment Analysis through Microblogging Data

“…Immediacy, tightness, depth, breadth and resilience are the five key characteristics of a liquid market, according to Sarr and Lybek (2002). Market liquidity can be determined by trading cost, trading quantity, trading speed and price dispersion (Le and Gregoriou 2020). It follows then that informed trading risk must be priced in the liquidity (Saleemi 2020).…”

“…Liquidity is considered as a time-varying risk factor (Hasbrouck and Seppi 2001), as well as a crucial attribute of capital assets (Amihud and Mendelson 1991). The financial asset whose return is more sensitive to liquidity shocks has a higher expected return (Le and Gregoriou 2020). More recently, it has been found that returns are very sensitive to liquidity shocks in environments of high uncertainty, such as the current COVID-19 crisis (Saleemi 2021).…”

“…A small trading volume reduces the size of the spread, which in turn adds liquidity to the market and improves price accuracy (Sarkissian 2016). According to Le and Gregoriou (2020), there is a strong relationship between higher trading volume and higher spread due to asymmetric information effects.…”

“…Liquidity, or its risk, is an active area of research as it imposes immediate consequences on the financial transaction (Guijarro et al 2019). Market liquidity can be explained by its dimensions, which include transaction execution cost, trading quantity, immediacy of transaction execution and asset price dispersion (Le and Gregoriou 2020). Trading is considered illiquid (Gorton and Metrick 2010), and it is assumed that asymmetric information risk should be priced into liquidity (Saleemi 2020).…”

COVID-19 uncertainty and Bitcoin market, linking the liquidity cost to the cryptocurrency yields

“…The liquidity cost or lower bid-price ensures, that a liquidity provider can possibly generate yields on the future resale of the holding inventory. The yield sensitivity to the market liquidity shocks can generate higher returns on the investment (Le & Gregoriou, 2020).…”