Research and publications
Robust and Interpretable Liquidity Proxies for Market and Funding Liquidity
The Journal of Fixed Income Winter 2021
The authors introduce a method to create two interpretable liquidity measures, which we associate with market and fundi ...
Author(s):
Riccardo Rebonato, Hong Sherwin
Summary:
The Journal of Fixed Income Winter 2021
The authors introduce a method to create two interpretable liquidity measures, which we associate with market and funding liquidity. The construction is based on creating two parsimonious linear combinations of the many liquidity proxies often used in the liquidity literature, both displaying mean-reverting behavior, but characterized by very different reversion speeds. Our construction does not require transaction-level data (such as volume or bid-offer spreads), but correlates well both with other measure that do, and with other liquidity proxies (liquidity as ‘noise’, liquidity as broker-dealer leverage) recently introduced in the literature.
Key Findings
• The authors introduce two interpretable liquidity measures that can be obtained from publicly available prices, and correlate well with liquidity measures that require transaction-level information.
• Their measures have distinct reversion speeds, which sort and mirror the different reversion speeds of the input liquidity proxies.
• They interpret our measures as relating to market and funding liquidity, and we justify this interpretation.
• They present a brief application (to the extraction of inflation expectations from the break-even yield) to give an idea of how our measures can be used.
| Type : | Academic Publication |
|---|---|
| Date : | 25/09/2020 |
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
