Hot answers tagged liquidity
7
From Implied Liquidity : Towards stochastic liquidity modeling and liquidity trading
We will call the parameter, fitting
the bid-ask spread (under a symmetric
distortion) around the mid price, the
implied liquidity parameter. Hence for
the European Call option (strike K and
maturity T ) with given market bid (b)
and ask (a) prices, the implied
...
6
There are several. This list is from Giyenko et al (2008)---in their work they compare all these different measures--- and includes spread proxies and price impact proxies. As for spread proxies:
"Effective Tick" (Holden 2007, Giyenko et al 2008)
"Holden measure" (Holden 2007)
"LOT Y-split" (Giyenko et al 2008)
"Roll measure" (Roll 1984)
"Gibbs measure" ...
5
Volume merely indicates how much buy-side interest exists in a stock. For liquidity, the sell-side interest is more relevant, which implies the quote characteristics (the limit-order book).
In addition to the bid-ask spread, I look at the top-of-book quote size. Here's an example from BATS:
sym | bid ask bidsize asksize
----| ...
4
For a non-listed company you usually have a poor idea of the share value. If you do not know the underlying price it is impossible to accurately estimate the option price.
So, for cases like this, people typically analyze the options on a risk/reward basis, using similar scenario analyses to those used to analyze the cashflows, assets and other components ...
4
For my master thesis, I used the bid-ask spread as a liquidity measure. Intuitively, it is the price to the have the liquidity (or even the price of liquidity); the bigger the bid-ask spread, the lower the liquidity.
I know that Carlo Acerbi of MSCI is also looking into liquidity risk management and has a very interesting model for liquidity which is ...
4
That's an interesting question, and I believe your example does indeed show that the answer is "yes". However, just because you paid a lower average price doesn't mean that there isn't market impact, especially if the writer of the option was naked (didn't have the stock already and had to buy it himself on the open market). It's just that the holder of the ...
3
The common practices are:
if you trade less than 8% of the Average Daily Volume, you can use a VWAP or Implementation Shortfall algo.
you need to "add" a slippage of 1/3 of the bid ask spread of the stock.
Your only issue is that you want to use the close price instead of the VWAP one. Best option is to use the daily VWAP as a proxy. Otherwise measure ...
3
From an academic viewpoint you do not have a lot of choices:
The Rosenbaum-Robert approach, the price model with uncertainty zones is a model of trades and duration between trades (implicitly). It is worthwhile to try it.
You can also use an Hawkes process, it will have the nice effect of capturing clustering effects on trades.
if you want to use ...
3
I just reviewed the paper Corporate Bond Liquidity Before and After the Onset of the Subprime Crisis by Dick-Nielsen, Feldhütter and Lando. They define a liquidity measure $\lambda$ as a conglomerate of
price impact (Amihud) and its variability
spread covariance (Roll) and its variability
turnover
imputed roundtrip cost (Feldhütter)
zero trading days
I ...
3
Whether or not to exercise an option when the underlying is near the money can be a very complicated problem that depends on much more than simply whether or not the underlying is just over or under the strike price. Options traders refer to this as pinning, which tends to happen much more often than you might expect if stock price movements were truly ...
3
In general liquidity is most often modeled, for most types of instruments, via proxy by the 'bid-ask spread'
(wider = less liquid, narrower = more liquid)
You can choose to model the bid-ask spread in dollars, or what is often most helpful, for options, is to model the bid-ask spread in terms of implied volatility (of the difference between the bid and ask ...
3
Here are some practical application for trading illiquid names:
For pricing/forecasting:
You still still calculate fair volatility using stock print data. In an illiquid stock and there's a large open interest in the market where professional traders are long, vol might diminish since when stock goes up(down), all the vol traders would be selling(buying) ...
3
To search for "stop-hunting" I would search for stop orders and doing so on ssrn turned up the following:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=920687
But if you're looking for something that addresses what's in the body of the question then I'd search for something entirely different. When one knows there is a large cluster of orders in the ...
2
The academic term for this phenomenon is "predatory trading." Brunnermeier and Pederson (2005) wrote an entire paper on the topic, and you can also examine the references contained therein.
This paper studies predatory trading, trading that induces and/or exploits the need of
other investors to reduce their positions.We show that if one trader needs ...
2
Using intra-day data, the concept of viscosity is easier to define. At the microstructure scale, you can see the price moves as a diffusion constrained by the quantities in the order books. Viscosity is a mix of pressure of volumes, rounding by the tick size, and bid-ask bounce.
See for instance A New Approach for the Dynamics of Ultra-High-Frequency Data: ...
2
You can have a look at what the guys at Nanex.
Here is an example of what they look at. The chart is colour coded for market depth (the colder the colour the less depth)
1
I would look at the following metrics when quantifying "liquidity" in listed options:
bid/offer spread
number contracts traded and from that follows notional traded (in the option not underlying)
frequency of bid/offer adjustments relative to changes in the underlying delta.
frequency of liquidity added/removed on the bid and offer side even when no ...
1
Another consideration here is whether the option is settled in cash or the security. For example S&P100 options listed on the CBOE are cash-settled which means that you will receive the cash difference between the strike and the price, and not the underlying security. In this case, there is clearly no benefit to exercising when the underlying is ...
1
No, exercising an out-of-the money option is never worth it. In your scenario, you should start buying at \$10. Keep buying until you push the ask up to \$10.09, then exercise however many options it takes you to get to 10,000 shares. This will get you your 10,000 shares at a lower cost than simply buying them all for $10.08 through exercising your ...
1
You may also be interested in a series of papers by Easley, de Prado, and O'Hara (2011), Flow Toxicity and Volatility in a High Frequency World. This paper follows up on a measure of the effect of trades on prices developed by two of the authors in 1987. They show that the new measure, which takes volume and concurrent price movements into account, can ...
1
First: once you will have your liquidity indicator, you will need to know if the signal is worth the risk to go faster (or slower if it is a negative signal). Impulse control will tell you that: http://www.ceremade.dauphine.fr/~bouchard/pdf/BML09.pdf
Optimal control of trading algorithms: a general impulse control approach, by Bruno Bouchard, Ngoc Minh Dang, ...
1
The paper by Tavi Ronen is interesting in its analysis of the liquidity and price discovery.
Where Did All the Information Go? Trade in the Corporate Bond Market
As I pointed out above a simple measure is the one by Boa et al in their
"Illiquidity of corporate bonds" (see link in my comment to Brian's answer)
For a very different take on what being ...
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