Latent liquidity: A new measure of liquidity,with an application to corporate bonds |
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| Authors: | Sriketan Mahanti Amrut Nashikkar Marti Subrahmanyam George Chacko Gaurav Mallik |
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| Institution: | 1. Orissa Group Inc., 1050 Winter Street, Suite 1000 Waltham, MA 02451, USA;2. State Street Global Advisors, One Lincoln Street, Boston, MA 02111, USA;3. Stern School of Business, New York University, 44 W 4th Street, New York, NY 11220, USA;4. 6S Capital GmbH, Bahnhofstrasse 11, 6300 Zug, Switzerland |
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| Abstract: | We present a new measure of liquidity known as “latent liquidity” and apply it to a unique corporate bond database. Latent liquidity is defined as the weighted average turnover of investors who hold a bond, in which the weights are the fractional investor holdings. It can be used to measure liquidity in markets with sparse transactions data. For bonds that trade frequently, our measure has predictive power for both transaction costs and the price impact of trading, over and above trading activity and bond-specific characteristics thought to be related to liquidity. Additionally, this measure exhibits relationships with bond characteristics similar to those of other trade-based measures. |
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| Keywords: | G 100 |
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