.chapter25<-function(i=0){ " i Chapter 25: Liquidity measure (add soon) - ------------------------------------- 1 How to define liquidity? 2 Why liquidity is important? 3 How to measure liquidity? 4 current ratio, quick and cash ratios 5 bid-ask spread 6 High-frequency data 7 Definitions of Mode and EX 8 Roll Spread 9 Amihud's (2002) illiquidity 10 Pastor and Stambaugh (2003) liquidity measure 11 12 13 14 15 16 17 18 19 Videos 20 Links Example #1:>.c25 # see the above list Example #2:>.c25(1) # see the first explanation ";.zchapter25(i)} .c25<<-.chapter25 .n25chapter<-20 .zchapter25<-function(i){ if(i==0){ print(.c25) }else{ .printEachQ(25,i,.n25chapter) } } .C25EXPLAIN1<-"How to define liquidity? //////////////////////////////// Liquidity is defined as a) How quickly convert an asset into cash b) without losing its true value /////////////////////////////// " .C25EXPLAIN2<-"Why liquidity is important? //////////////////////////////// For several reasons that liquidity matters a) short-term survival b) less costly for investors /////////////////////////////// " .C25EXPLAIN3<-"How to measure liquidity? //////////////////////////////// Accounting: 1) current ratio 2) quick ratio 3) cash ratio Finance 1) bid-ask spread 2) Aminud (2002) illiquidity 3) Pastor and Stambaugh (2003) 4) /////////////////////////////// " .C25EXPLAIN4<-" current ratio, quick and cash ratios //////////////////////////////// Current assets Current ratio = -------------- current liablities Current assets - Inventory Quick ratio = --------------------------- current liablities Cash & its equvalents Cash ratio = ---------------------- current liabilities /////////////////////////////// " .C25EXPLAIN5<-"bid-ask spread //////////////////////////////// Spread = askPrice - bidPrice spread askPrice - bidPrice relative Spread = --------- = ------------- average average average= (askPrice + bidPrice)/2 /////////////////////////////// " .C25EXPLAIN6<-"High-frequency data //////////////////////////////// > show_cq1day(10) SYMBOL DATE TIME BID OFR BIDSIZ OFRSIZ MODE QSEQ EX 1 AC 19901101 9:30:44 12.875 13.125 32 5 10 1586 N 2 AC 19901101 9:30:47 12.750 13.250 1 1 12 0 M 3 AC 19901101 9:30:51 12.750 13.250 1 1 12 0 B 4 AC 19901101 9:30:52 12.750 13.250 1 1 12 0 X 5 AC 19901101 10:40:13 12.750 13.125 2 2 12 0 M 6 AC 19901101 13:36:15 12.875 13.000 32 10 12 1593 N 7 AC 19901101 13:36:17 12.750 13.125 1 1 12 0 B 8 AC 19901101 13:36:21 12.750 13.125 1 1 12 0 X 9 AC 19901101 13:40:03 12.875 13.000 32 8 12 1594 N 10 AC 19901101 13:46:17 12.875 13.000 24 8 12 1596 N > shere SYMBOL : ticker DATE : Trading day TIME : second-by-second time stamp BID : Bid price OFR : Offer price BIDSIZ : size of the bid OFRSIZ : offer size MODE : conditions, see c13(7) QSEQ : Sequence number EX : Exchange sybmol, see c13(7) /////////////////////////////// " .C25EXPLAIN7<-"Definitions of MODE and EX //////////////////////////////// Quote condition. These conditions apply to quotes on all exchanges except as indicated. 0 - invalid field for that issue (e.g.,Nasdaq NMS issue). 1 Depth on offer side (1) - Indicated more size behind the quote being disseminated for the offer. This depth may be at the ask price of the quote or at a price immediately outside the disseminated ask quote. 2 Depth on bid side (2) - Similar to Mode 1 in indicating depth, but only for bid quotation 3 Closing quote (3) Indicates the last quote from a participant for that security during the trading day. There may be two closing quotes per symbol at the same price for market-onclose (MOC) transactions.4 4 News dissemination (4) - A regulatory halt used when relevant news influencing the stock is disseminated. Trading is suspended until the resultant impact has been assessed. 5 Fast trading (5) - Used during extremely active periods of short duration. While in this mode, quotes are entered on a \"best efforts\" basis. 6 Depth on bid and offer (6) - Indicated more size behind the reported quote for both bid and offer. The depth may be either at or immediately outside the quote. 7 Order imbalance (7) A non-regulatory halt used when there is a severe buy or sell order imbalance. To prevent a disorderly market,trading is temporarily suspended. 8 Closed market maker (NASD) (8) - This condition is disseminated by each market maker to signify either the last quote of the day or the premature close of a market maker for the day. In the latter case, the market maker can re-open by transmitting a quote accompanied by Mode 12. more...., see https://www.acsu.buffalo.edu/~keechung/TEM/TAQ%20User%20Guide.pdf /////////////////////////////// " .C25EXPLAIN8<-"Roll (1984) spread //////////////////////////////// Roll (1984) designs a method to estimate the spreads by using the first order covariance of price changes. S=2 *sqrt(-cov(A, B) ) (1) where A= deltaP(t-1) B= deltaPP(t) For more detail, see the term project or chapter 30 /////////////////////////////// " .C25EXPLAIN9<-"Amihud's (2002) illiquidity //////////////////////////////// Amihud (2002) illiquidity measure uses the absolute daily return over its corresponding trading dollar volume. A monthly stock illiquidity measure is the mean of daily illiquidity measure. 1 |Ri| illiq(t)= --- * sum (--------------- ) (1) n pi * Vi where illiq(t) is a monthly illiquidity measure, n is the number of trading days within the month, Ri is daily return on day i, Vi is the trading volume on day i and Pi is the closing price of the underlying stock on day i. For more detail, see Term Projects /////////////////////////////// " .C25EXPLAIN10<-"Pastor and Stambaugh (2003) liquidity measure //////////////////////////////// Basic logic:Pastor and Stambaugh (2003) design the following regression to estimate individual stock s liquidity. y(t)=alha + 1*x1(t-1)+ 2*x2(t-1)+error(t) (1) where,y(t) is the excess stock return on day t, the excess return is defined as R(t)-Rm(t), R(t) is the stock return, Rm(t) is the market return at time t; x1(t-1) is the lagged stock return, i.e., R(t-1), X2(t-1) is the lagged dollar trading volume, i.e., x2(t-1)=P(t-1)*V(t-1), P(t-1) is the daily closing price of the stock at t-1 and V(t-1) is the daily trading volume at t-1. For more detail see the c30 /////////////////////////////// " .C25EXPLAIN11<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN12<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN13<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN14<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN15<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN16<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN17<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN18<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN19<-"Videos //////////////////////////////// /////////////////////////////// " .C25EXPLAIN20<-"Links //////////////////////////////// http://www.investopedia.com/university/ratios/liquidity-measurement/ratio3.asp http://www.investopedia.com/university/ratios/liquidity-measurement/ http://www.bauer.uh.edu/rsusmel/phd/lecture%207.pdf https://kelley.iu.edu/cholden/Goyenko%20Holden%20and%20Trzcinka%20(2009).pdf Convenient liquidity measure for financial markets Oleh Danyliv, Bruce Bland, Daniel Nicholass, https://arxiv.org/pdf/1412.5072.pdf https://www.jstor.org/stable/2490741?seq=1#page_scan_tab_contents /////////////////////////////// "