Analysing liquidity and absorption limits of electronic markets with volume durations

Abstract

This paper focuses on the liquidity of electronic stock markets applying a sequential estimation approach of models for volume duration with increasing threshold values. A modified ACD model with a Box–Tukey transformation and a flexible generalized beta distribution is proposed to capture the changing cluster structure of duration processes. The estimation results with German XETRA data reveal the market's absorption limit for high volumes of shares, expanding the time costs of illiquidity when trading these quantities.

Keywords:

• Financial econometrics
• Econometric methods
• Econometrics of financial markets
• Copulas
• Statistical methods
• Financial time series
• Market microstructure
• Quantitative finance

Acknowledgments

The author is very grateful to Mark Trede for valuable and insightful comments. He is also grateful to the Editor and two anonymous referees for their suggestions that led to an improvement of this paper. He is particularly indebted to conference participants at the Asian Financial Association 2005 Annual Meeting, the European Meeting of Statisticians (EMS) 2005 and the International Workshop on Quantitative Finance 2006 for extensive discussions. Financial support from the Institute of Econometrics and Economic Statistics (IÖW), the German Research Foundation (DFG) and the EU (Marie Curie) is also gratefully acknowledged.