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I would like to find a way to measure Liquidity for Commodities Futures. I found the following 4 papers/definitions:

  1. Volume (Share / Dollar) (Dollar Volume Liquidity)

  2. Amivest Liquidity Ratio (Comparison of Liquidity Measures in the Stock Markets)

  3. Amihud: (The Night and Day of Amihud's (2002) Liquidity Measure by Yashar H. Barardehi, Dan Bernhardt, Thomas Ruchti, Marc Weidenmier :: SSRN, Illiquidity and stock returns:cross-section and time-series effects)

  4. (Commodities Liquidity Measurement and Transaction Costs)

The first 3 only refer to Stocks.

Are the above measures applicable both to Stocks and to Commodities?

Can they be applied to Future Contracts?

Would they be equally valid on daily basis vs a monthly or yearly basis?

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    $\begingroup$ What is your goal in measuring liquidity? $\endgroup$
    – user42108
    Commented Mar 11, 2021 at 23:26
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    $\begingroup$ ADV (average daily volume) and OI (open interest) are the usual ones... but what are you trying to measure here? $\endgroup$
    – demully
    Commented Mar 12, 2021 at 0:23
  • $\begingroup$ @user42108 My goal in measuring liquidity is to understand how liquid a future contract is compared to the others. $\endgroup$
    – Newbie
    Commented Mar 12, 2021 at 7:42
  • $\begingroup$ @demully I'm trying to measure liquidity of future commodity contracts. $\endgroup$
    – Newbie
    Commented Mar 12, 2021 at 7:43
  • $\begingroup$ "My goal in measuring liquidity is to understand how liquid a future contract is compared to the others" - different liquidity measures will give you different answers to that question, which is why I asked. In addition, commodity futures are likely to be different and probably more complicated than stocks when it comes to liquidity measurement as they are often traded via calendars or cross-market spreads (e.g. crack, crush...) which are an important source of liquidity. $\endgroup$
    – user42108
    Commented Mar 12, 2021 at 14:06

2 Answers 2

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The usual measures are trade volumes (from all sources of trades / order books), bid/offer spread, order book depth, quote ages, trade frequency, etc. For quick comparisons, average daily volume is the best (and easy to obtain).

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As stated by user42108 in his comment, there are many different contracts for a given commodity. As an example for the energy market, you can have monthly/quarterly or even daily futures (for instance, power at EEX).

Thus a product with a daily delivery can be liquid only nearly the contract expires.

Therefore, you can define the liquidity using the average daily volume in a recent time window as suggested by this answer adding some additional constraints/penalty, such as a minimum number of days with at least $N$ trades.

Nevertheless, the time window needed to compute the average volume is strongly dependent on your needs.

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