Title

Liquidity: Systematic Liquidity, Commonality, and High-Frequency Trading

Document Type

Book Chapter

Publication Title

The Handbook of High Frequency Trading

Abstract

Empirical work investigating commonality in liquidity and systematic liquidity risk utilizes various different estimators of systematic liquidity. This chapter is the first to compare and contrast such estimators. We distinguish two classes of systematic liquidity estimators that both have many followers in the literature: (1) weighted average estimators based on concurrent liquidity shocks and (2) principal components estimators based on both concurrent and past liquidity shocks. Our results show that the simpler weighted average estimators perform at least as well as the more complex principal components estimators. This finding is robust across different evaluation criteria and different underlying liquidity measures.

DOI

https://doi.org/10.1016/B978-0-12-802205-4.00012-9

Publication Date

2-2015

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