Boston Meeting: Estimation of a Global Liquidity and Trading Cost Model

Estimation of a Global Liquidity and Trading Cost Model
Dan diBartolomeo
Market events of the past year have once again focused the attention of investors, particularly quantitatively driven investors on matters of liquidity. This first part of this presentation will review the general functional form of market impact models, and on a specific functional form that offers the advantage of incorporating rational boundary conditions lacking in many similar models. We will then describe the emprical estimation of the model based on a dataset of more than 1.5 million anonynmous institutional trades in liquid developed markets. The next part of the presentation will be extend the model to all traded equities into more than seventy countries including emerging and frontier markets, for which no actual trade data was available. To do this we measure positive serial correlation in high frequency return, as a well documented manifestation of illiquidity. Using non-parametric "runs" tests, the degree of serial correlation for stocks in all the various markets is measured and mapped into the spectrum of stocks for which actual trading cost data was available. As a check of the robustness of the results, we compare our results with an entirely separately estimated market impact model based on the method Lee and Ready (1991) using tick by tick data on a sample of six thousand global equities over two years.