Monday, November 03, 2008

Volume May not be a good Liquidity Measures

The measure of liquidity should be an indication of the matching of supply and demand. The ideal indication of this is a consistent bid ask spread. If the bid ask spread changers regularly, then this is a indication of imbalance of supply and demand.

A fist judgement equation is:

Liquidity = Mean(spread) / SD(spread) * % volume average trade size / MAD(volume size) * % matched orders w.r.t. all bid and ask volume

MAD: See - http://en.wikipedia.org/wiki/Median_absolute_deviation

Suminda Sirinath Salpitikorala Dharmasena

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