Convenient liquidity measure for Financial markets

TL;DR

This paper introduces a new liquidity measure called LIX, based on consideration and price range, which can be estimated from daily or intraday data and linked to existing measures, enabling liquidity analysis of various financial instruments.

Contribution

The paper proposes a novel liquidity measure, LIX, that can be scaled for intraday data and used to derive liquidity of baskets and ETFs, enhancing liquidity assessment methods.

Findings

LIX correlates with weighted average bid-ask spread.

LIX can be estimated from intraday data using a time scaling mechanism.

A formula for ETF liquidity based on its constituents and shares is derived.

Abstract

A liquidity measure based on consideration and price range is proposed. Initially defined for daily data, Liquidity Index (LIX) can also be estimated via intraday data by using a time scaling mechanism. The link between LIX and the liquidity measure based on weighted average bid-ask spread is established. Using this liquidity measure, an elementary liquidity algebra is possible: from the estimation of the execution cost, the liquidity of a basket of instruments is obtained. A formula for the liquidity of an ETF, from the liquidity of its constituencies and the liquidity of ETF shares, is derived.