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Autocorrelation of returns can be used as a proxy measure for liquidity of the asset. The degree of serial correlation in an asset’s returns can be viewed as a proxy for the magnitude of the frictions, and illiquidity is one of the most common forms of such frictions. A strongly liquid asset should reveal no serial autocorrelation. You can perhaps build ...


3

For clarity, I'll use two expressions, "liquidity premium" and "illiquidity premium": "Liquidity premium" arises when investors value the liquidity profile of an instrument so much that they are willing to pay for the enhanced liquidity, thus pushing the price of the instrument above fair value (and its yield below fair value). "Illiquidity premium" arises ...


3

Answers to your 3 questions: Empirically, there is no effect. I understand that this is not logical but it is reality. Adding thickness to an order book does not necessarily make it harder or easier for a stock to move. If your order is static it will be recognized quite quickly and used by other participants for liquidity. It will attract participants ...


3

Couple points for your consideration: At the time of order execution: You are most likely a liquidity taker and thus are rendered a service by those that provide liquidity and you compete for taking liquidity with other takers in the market. As such you need to have a firm grasp at the market impact of your order. Liquidity can be extremely dynamic even ...


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So far I only know that SunGard has a product named "Ambit Focus", where its module "Liquidity Risk" supports the LCR and NSFR reports according to Basel III liquidity rules.


2

I really like Philip P's work, but frankly I do not believe this paper is his best one. It is understandable you do not catch how to use it: there is no dataset in the paper, and the orders of magnitude of $\sigma dW$ and $\delta_t x$ are so different. My suggestions: some components are missing, $x$ should be a point process, for instance an Hawkes ...


1

A Limit sell order works by setting the target price where you want to sell. If this target price is less than the current best bid, then yes you are correct, it would be the same as the stop loss order. But if the target price is more than the current best bid, then it would just be a limit order on the ask side and it won't get executed. A Stop loss order ...


1

Limit sell is a plain limit sell order, sell stop is a market sell order triggered at the specified price


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I do not find convincing the argument that the yield curve is upward sloping due to the lack of a secondary market for longer dated securities. In fact, there is a highly liquid market for 2yr, 5yr, 10yr and 30yr Treasuries and yet the yield curve is still biased to be upward sloping. Intuitively I find that the slope is due to the extra yield that an ...


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Excellent work on this has been done by Abbott in the Valuation Handbook. See: Abbott, A. (2009) Valuation Handbook: Measures of Discount for Lack of Marketability and Liquidity. Wiley Finance, Hoboken, 474-507.


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Cost of liquidation should include the explicit costs: fees (brokers, exchanges, give-up, post trading, etc) the implicit costs that you cannot know for sure a priori. They are themselves made of slippage: linear costs mostly, a function of the bid ask spread. If you use a dumb trading algo, you will pay a full bid-ask spread, you are right. But if you ...


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My interpretation of this statement is that abundant availability of liquidity and funding will push banks to adopt reckless strategies, especially in terms of maturity transformation $-$ i.e. borrowing short-term and lending long-term to earn a spread $-$, leaving them exposed to a sudden liquidity impact which could dry their short-term financing sources ...


1

Once your daily gamma start approaching a reasonable fraction of DV, those resting order will start killing vol (if anyone tells you otherwise, they just haven't reached that threshold). Usually you see this effect on large corporate trades such as ASRs or large stake acquisitions. As an curiosity, one of the HF traders used to be called "the put bomber". ...


1

Consider this: If there is infinite volume available at both bid and ask, then the price of the asset will never move irrespective of the size of the incoming market order, the mid will always be the same. 0 volatility. There are traders who use quantity available at a price as a resistance and support and trade accordingly.


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limit orders (buy orders below the market, sell orders above the market) obviously reduce volatility all other things constant, by acting as a kind of partially absorbing barrier against incoming trades (i.e. makes it harder for noise traders to move the price up or down). On the second question liquidity is to some extent self-reinforcing, more depth means ...


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Market liquidity refers to the ease with which an asset can be traded on the market. In the financial literature, it is generally assumed that assets have a "fundamental" value that correspond to the discounting expected cashflows of this asset. This is roughly the Efficient Market Hypothesis (EMH). This value should correspond to the "market price", or "...


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OneSumX (FRS Global - now officially Wolters Kluwer Financial Services). Due to the impact on market risk (explicit creation of new contracts from available liquidity lines, firstly affected by interest rate risk) and on credit risk (negative exposure to be considered in the LCR, and not simply floored to zero) you might need both the market and liquidity ...


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