Measuring the Stock Liquidity Using a Market Microstructure Approach

The main objective of this research is to identify the most important liquidity measures and their behavior during the trading day. For this purpose, the intraday data of 7 stocks of the Tehran Stock Exchange have been used to calculate 27 liquidity measures selected from the literature. At the first step, the distribution features and the correlation structure of the liquidity measures are examined. Using the Principal Components Analysis method, these components are identified, and their intraday patterns are extracted. The results show that reducing the number of measures to four final measures that can describe all aspects of liquidity without eliminating helpful information is possible and helps reduce the complexity of studies in this area. Relative Spread with mid quoted prices can be mentioned as the most practical microstructure component affecting liquidity. Based on this measure's intraday pattern, it can be said that this measure is minimized in the middle of the day. Therefore, liquidity is high during these hours, and favorable conditions for trading are provided. In the end, stocks are ranked based on all 27 liquidity measures through two different methods, and the most liquid stock is determined.