Revamping Liquidity Measures: Improving Investability in Emerging and Frontier Market Indices and Their Related ETFs

Abstract

This article presents a new way of measuring stock liquidity. Recent research has demonstrated that measures based on volume, transaction, and turnover do not on their own measure liquidity, so the author introduces a method that uses price and bid–ask spread (not dollar volume, transactions, or turnover) as the primary inputs and extreme value theory to build the measure. The author demonstrates the method’s value by its ability to successfully identify liquid stocks in emerging and frontier markets better than measures of liquidity based on volume, transaction, or turnover.