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Market Liquidity

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Encyclopedia of Finance

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Abstract

Liquidity, which is integrally related to trading costs, refers to the ability of individuals to trade at reasonable prices with reasonable speed. As such, liquidity is a major determinant, along with risk and return, of a company’s share value. Unfortunately, an operational, generally accepted measure of liquidity does not exist. This entry considers the following proxy measures: the bid–ask spread, the liquidity ratio (which relates the number or value of shares traded during a brief interval to the absolute value of the percentage price change over the interval), and the variance ratio (which relates the volatility of short-term price movements to longer-term price movements). The determinants of liquidity considered are the size of the market for a stock and market structure. The paper concludes by stressing that illiquidity increases the cost of equity capital for firms, but that trading costs can be reduced and liquidity enhanced by the institution of a superior trading system.

This material is modified from an equivalent entry from: The New Palgrave Dictionary of Money and Finance, by: Newman, Peter. Reprinted with permission of Palgrave Macmillan. Copyright © Newman, Peter.

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Author information

Authors and Affiliations

  1. Baruch College of the City, University of New York, New York, NY, USA

    Robert A. Schwartz & Lin Peng

Authors
  1. Robert A. Schwartz
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  2. Lin Peng
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Correspondence to Robert A. Schwartz .

Editor information

Editors and Affiliations

  1. Dept. Finance, Rutgers University, Rockafeller Road 94, New Brunswick, 08854-8054, New Jersey, USA

    Cheng-Few Lee

  2. College of Business, San Francisco State University, Holloway Ave. 1600, San Fransisco, 94132, California, USA

    Alice C. Lee

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© 2013 Springer Science+Business Media New York

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Schwartz, R.A., Peng, L. (2013). Market Liquidity. In: Lee, CF., Lee, A. (eds) Encyclopedia of Finance. Springer, Boston, MA. https://doi.org/10.1007/978-1-4614-5360-4_37

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  • DOI: https://doi.org/10.1007/978-1-4614-5360-4_37

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  • Publisher Name: Springer, Boston, MA

  • Print ISBN: 978-1-4614-5359-8

  • Online ISBN: 978-1-4614-5360-4

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