A Practical Approach to Liquidity Calculation

Abstract

In this article, the authors propose a new measure for liquidity that allows the user to estimate the liquidity of different instruments, regardless of exchange or the currency in which they are traded. The measure can be estimated from the order book data or by using historic measurement over the day. These two forms of the metric have proved to be well correlated with each other and allow for real-time monitoring of markets or historical calculation of liquidity. A simple liquidity algebra is considered to calculate the liquidity for portfolios of both stock and exchange-traded fund instruments.