A Common Measure of Liquidity Costs for Futures and Stock Exchanges
Christopher Ting, Singapore Management University, Lee Kong Chian School of Business, 50 Stamford Road #05-01, Singapore 178 899, Singapore, christophert@smu.edu.sg
Abstract
Inspired by Roll’s (1984) formula, this chapter presents a new method to estimate the liquidity cost incurred by a trade, which may be interpreted as the price impact at the instance when the order is filled. We show that Roll’s square-root formula is a special case of our proposed method. For high-frequency empirical analysis, we provide a case study to compare the liquidity of trading a futures contract versus a board lot of an exchange-traded fund on the same underlying MSCI Singapore Free ...
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