Back from Beyond the Bid–Ask Spread: Estimating Liquidity in International Markets



Research on the topic of liquidity has greatly benefited from the improved availability of data. Researchers have addressed questions regarding the factors that influence bid–ask spreads and the relationship between spreads and risk, return and liquidity. Intraday data have been used to measure the effective spread, and researchers have been able to refine the concepts of liquidity to include the price impact of transactions on a trade-by-trade analysis. The growth in the creation of tax-transparent securities has greatly enhanced the visibility of securitized real estate, and has naturally led to the question of whether the increased visibility of real estate has caused market liquidity to change. Although the growth in the public market for securitized real estate has occurred in international markets, it has not been accompanied by universal publication of transaction data. Therefore, this article develops an aggregate daily data-based test for liquidity and applies the test to U.S. data in order to check for consistency with the results of prior intraday analysis. If the two approaches produce similar results, we can apply the same technique to markets in which less detailed data are available and offer conclusions on the liquidity of a wider set of markets.