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Article

Liquidity—How to Capture a Multidimensional Beast

Philip Sommer and Stefano Pasquali
The Journal of Trading Spring 2016, 11 (2) 21-39; DOI: https://doi.org/10.3905/jot.2016.11.2.021
Philip Sommer
leads a quant team in the liquidity research group at Bloomberg in New York, NY. psommer5@bloomberg.net
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Stefano Pasquali
is the global head of liquidity research at Bloomberg in New York, NY. spasquali1@bloomberg.net
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Abstract

Despite its importance, there currently exists no universally agreed upon and adopted measure or model that adequately captures cost and time to liquidation in bond (over-thecounter) markets. To fill this gap, we reviewed 40 years’ worth of research and summarize our findings in this article. We claim that the lack of concurrence on a definition can be attributed to the lack of consistent methodology. Connecting the dots within the vast body of literature, we find the key ingredients of such a novel measure: Taking market impact models as a natural starting point and adding the necessary math to quantify the inherent uncertainty of such a measure. We further suggest that machine learning methods are a natural candidate to overcome the main obstacles in this process, as they can help extract useful information from the extremely sparse data that form the main difference between equity and bond markets.

  • © 2016 Institutional Investor, Inc.
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The Journal of Trading: 11 (2)
The Journal of Trading
Vol. 11, Issue 2
Spring 2016
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Liquidity—How to Capture a Multidimensional Beast
Philip Sommer, Stefano Pasquali
The Journal of Trading Mar 2016, 11 (2) 21-39; DOI: 10.3905/jot.2016.11.2.021

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Liquidity—How to Capture a Multidimensional Beast
Philip Sommer, Stefano Pasquali
The Journal of Trading Mar 2016, 11 (2) 21-39; DOI: 10.3905/jot.2016.11.2.021
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  • Article
    • Abstract
    • DIGGING DOWN TO THE ROOTS—WHAT WE CAN LEARN FROM TRADITIONAL VIEWS ON LIQUIDITY
    • INVENTORY RISK—THE BID–ASK SPREAD WIDENS WITH SIZE
    • MARKET MICROSTRUCTURE—THE RULES OF THE GAME DEFINE ITS OUTCOME
    • MODELING THE SHAPE OF THE MARKET IMPACT CURVE
    • THE BASEL COMMITTEE DEFINITIONS
    • ASSET CHARACTERISTICS AS PROXIES
    • MARKET CONDITIONS, THE BUSINESS CYCLE, AND LIQUIDITY CRISES
    • PRICE UNCERTAINTY DISTRIBUTIONS—A NEW WAY OF THINKING ABOUT LIQUIDITY
    • CAPTURING THE BEAST: TOWARD A NEW FRAMEWORK
    • ENDNOTE
    • REFERENCES
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