Liquidity and Simulation : A Survey of Liquidity Measures Using TraderEx

This paper examines a number of widely used liquidity measures to assess the consistency and reliability of the measures across different liquidity scenarios. A review is conducted of the various measures (based on Gabrielsen, Marzo and Zagaglia, 2011). This paper expands upon their review, by simulating liquidity scenarios using TraderEx software and comparing the sensitivity of the measures to the simulated data. Additionally, empirical data are tested on low and high liquidity assets from the S&P 500 to assess if the differences in empirical data are transferrable (and consistent) with differences in the simulations. Results indicate that the current measures are quite limited due to the inflexibility they exhibit with respect to number of assets, time dependence and time structure dependence. This paper proposes to design new measures for liquidity identification and measurement in simulated environments, which can then be applied to empirical markets, which do not require the rigid assumptions associated with traditional time-series methods