Measuring Liquidity in Financial Markets

Measuring Liquidity in Financial Markets

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This paper provides an overview of indicators that can be used to illustrate and analyze liquidity developments in financial markets. The measures include bid-ask spreads, turnover ratios, and price impact measures. They gauge different aspects of market liquidity, namely tightness (costs), immediacy, depth, breadth, and resiliency. These measures are applied in selected foreign exchange, money, and capital markets to illustrate their operational usefulness. A number of measures must be considered because there is no single theoretically correct and universally accepted measure to determine a market's degree of liquidity and because market-specific factors and peculiarities must be considered.100OO 8000 6000 4000 2000 0 3.0 2.5 2.0 1.5 1.0 0.5 0.0 8QQQ.0 6000.0 40 0 0 , 0 2000, 0 0, 0 3000 2500 2000 1500 ... M exico- Fiuure 4 Num her of T rudes (m illions) Equity: Mexico - Figure 7 Turnover (m In MXP) 5aamp;5 ras -If, til riJI^bkfA.

Title:Measuring Liquidity in Financial Markets
Author: Abdourahmane Sarr, Tonny Lybek
Publisher:International Monetary Fund - 2002-12-01

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