The Comparison Study of Liquidity Measurements on the Chinese Stock Markets

ABSTRACT

The measurement of liquidity is the basis of research in market microstructure studies. Based on the intraday tick trading data on Chinese stock markets from 2009 to 2016, we run horseraces of monthly estimates of newly and widely employed low-frequency liquidity proxies in the literature against three types of bid-ask spread high-frequency benchmarks. The empirical results reveal that the closing percent quoted spread estimator has the smallest estimation error, and the FHT estimator has the highest correlation. Moreover, these two estimators win the majority of horseraces in terms of estimation error and correlation comparison with the high-frequency benchmarks. Meanwhile, we find that most liquidity estimators based on Roll’s model do not perform well. Because the performance metrics of estimation precision or correlation performance on related liquidity issues differ depending on the type of research, our study offers appropriate liquidity measures for different research purposes.

KEYWORDS:

• Bid-ask spread
• correlation
• estimation error
• liquidity measures

JEL:

• G11
• G12
• G14

Supplementary Material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

1. See Goyenko, Holden, and Trzcinka (2009), Corwin and Schultz (2012), and Abdi and Ranaldo (2017) for the US stock markets, Marshall, Nguyen, and Visaltanachoti (2012) and Karnaukh, Ranaldo, and Söderlind (2015) for the US commodity futures and foreign exchange markets, Bao, Pan, and Wang (2011), Friewald, Jankowitsch, and Subrahmanyam (2012), and Schestag, Schuster, and Uhrig-Homburg (2016) for the US bond markets.

Additional information

Funding

This project is supported by the National Natural Science Foundation of China [61603010, 61603011, and 61773029], National Statistical Science Research of China [2019LY77], 2018 Research Foundation of Capital University of Economics and Business [00591965261309].