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Title
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The LIX : a model-independent liquidity index
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Author
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Abstract
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| This paper provides a new model-free indicator of liquidity, the so-called LIX index. The computation of the LIX index combines the conic finance theory, which recognizes the two- price economy and is built upon the concept of indices of acceptability of Cherny & Madan (2010), with the option payoff spanning formula of Breeden & Litzenberger (1978). Matching the conic finance bid and ask prices of the stock with those observed in the market allows us to derive a model-free and unit-less indicator of spot liquidity. Just as the VIX and the SKEW index quantify the volatility and the tail risk perceived by todays investors, the resulting LIX index measures, in a similar market-implied fashion, the liquidity risk. The maximum likelihood estimation of popular mean-reverting processes applied to model-free liquidity time series indicates that spot liquidity tends to dry up during distress periods whereas a global drying-up of liquidity could not be detected during turmoil periods in the option market. |
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Language
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English
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Source (journal)
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Journal of banking and finance. - Amsterdam
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Publication
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Amsterdam
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2015
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ISSN
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0378-4266
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DOI
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10.1016/J.JBANKFIN.2015.04.015
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Volume/pages
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58
(2015)
, p. 214-231
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ISI
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000360510300015
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Full text (Publisher's DOI)
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Full text (open access)
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Full text (publisher's version - intranet only)
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