Estimating Market Liquidity

Abstract

Liquidity has been recognized as an important determinant of the efficient working of a market. Following the conventional definition of liquidity, an asset is considered as being liquid if it can be traded quickly, in large quantities and with little impact on the price. According to this concept, the measurement of liquidity requires to account for three dimensions of the transaction process: time, volume and price. Kyle (1985) defines liquidity in terms of the tightness indicated by the bid-ask spread, the depth corresponding to the amount of one-sided volume that can be absorbed by the market without inducing a revision of the bid and ask quotes and resiliency, i.e., the time in which the market returns to its equilibrium.