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  • Measuring and Predicting Liquidity

    in the

    Stock Market

    DISSERTATION

    der Universität St. Gallen,

    Hochschule für Wirtschafts-,

    Rechts- und Sozialwissenschaften (HSG)

    zur Erlangung der Würde eines

    Doktors der Wirtschaftswissenschaften

    vorgelegt von

    Rico von Wyss von

    Zürich

    Genehmigt auf Antrag der Herren

    Prof. Dr. Heinz Zimmermann

    und

    Prof. Dr. Alex Keel

    Dissertation Nr. 2899

    Novidea di Luigi Hofmann, Riazzino 2004

  • Die Universität St. Gallen, Hochschule für Wirtschafts-, Rechts- und Sozialwissenschaften

    (HSG), gestattet hiermit die Drucklegung der vorliegenden Dissertation, ohne damit zu den

    darin ausgesprochenen Anschauungen Stellung zu nehmen.

    St. Gallen, den 13. Januar 2004

    Der Rektor:

    Prof. Dr. Peter Gomez

  • To Anna

  • Acknowledgements

    During the last three years, I spent a marvellous time as teaching and research assistant

    at the Swiss Institute of Banking and Finance of the University of St. Gallen. Each of my

    superiors Heinz Zimmermann, Andreas Grünbichler and Manuel Ammann provided me with

    valuable insights in the academic life and stimulated my research interests. My thanks are

    also due to my colleagues at the institute who encouraged me during my thesis project. I

    shared many fruitful discussions with them.

    I am very indebted to my academic advisor Heinz Zimmermann and my co-advisor Alex

    Keel for their ongoing support and their helpful hints which made this thesis possible.

    My thanks go also to Charlie Beckwith for carefully proof-reading my English. I ac-

    knowledge financial support from the Förderervereinigung des Schweizerischen Institutes für

    Banken und Finanzen der Universität St. Gallen.

    My parents supported me wherever possible during my whole life and enabled me to

    pursue my education. They deserve my sincere gratitude.

    Finally, my thanks go to my wife Nadja Germann who finishes her thesis just at the same

    time. Her parents had to bear our frequent absences from home and took great care of our

    daughter Anna.

    St. Gallen, January 2004

    Rico von Wyss

    v

  • Contents

    List of Figures xi

    List of Tables xiii

    Introduction xvii

    I Liquidity – Definition and Measurement 1

    1 Liquidity in an Economic Framework 5

    1.1 Properties of Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

    1.2 Liquidity Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

    1.2.1 One-dimensional Liquidity Measures . . . . . . . . . . . . . . . . . . 9

    1.2.2 Multi-dimensional Liquidity Measures . . . . . . . . . . . . . . . . . . 16

    2 Data and Institutional Setting 23

    2.1 The Limit Order Book of the Swiss Exchange . . . . . . . . . . . . . . . . . 23

    2.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

    3 Summary Statistics and Correlations 31

    3.1 Summary Statistics of the Liquidity Measures . . . . . . . . . . . . . . . . . 32

    3.1.1 Summary Statistics of Adecco . . . . . . . . . . . . . . . . . . . . . . 32

    3.1.2 Summary Statistics of Baer . . . . . . . . . . . . . . . . . . . . . . . 33

    3.1.3 Summary Statistics of Richemont . . . . . . . . . . . . . . . . . . . . 35

    3.1.4 Summary Statistics of Ciba . . . . . . . . . . . . . . . . . . . . . . . 36

    3.1.5 Summary Statistics of Clariant . . . . . . . . . . . . . . . . . . . . . 37

    3.1.6 Summary Statistics of Givaudan . . . . . . . . . . . . . . . . . . . . . 38

    3.1.7 Summary Statistics of Holcim . . . . . . . . . . . . . . . . . . . . . . 40

    3.1.8 Summary Statistics of Kudelski . . . . . . . . . . . . . . . . . . . . . 41

    3.1.9 Summary Statistics of Lonza . . . . . . . . . . . . . . . . . . . . . . . 42

    3.1.10 Summary Statistics of Swiss Re . . . . . . . . . . . . . . . . . . . . . 43

    3.1.11 Summary Statistics of Swisscom . . . . . . . . . . . . . . . . . . . . . 44

    3.1.12 Summary Statistics of Serono . . . . . . . . . . . . . . . . . . . . . . 45

    3.1.13 Summary Statistics of Surveillance . . . . . . . . . . . . . . . . . . . 46

    3.1.14 Summary Statistics of Sulzer . . . . . . . . . . . . . . . . . . . . . . . 48

    3.1.15 Summary Statistics of Syngenta . . . . . . . . . . . . . . . . . . . . . 49

    3.1.16 Summary Statistics of Swatch Bearer Share . . . . . . . . . . . . . . 50

    vii

  • viii CONTENTS

    3.1.17 Summary Statistics of Swatch Registered Share . . . . . . . . . . . . 50

    3.1.18 Summary Statistics of Unaxis . . . . . . . . . . . . . . . . . . . . . . 52

    3.1.19 General Remarks about the Summary Statistics . . . . . . . . . . . . 53

    3.2 Stock Ranking according to Liquidity . . . . . . . . . . . . . . . . . . . . . . 54

    3.3 Correlations of the Liquidity Measures . . . . . . . . . . . . . . . . . . . . . 57

    4 Principal Component Analysis 59

    4.1 Principal Component Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 59

    4.2 Principal Component Analysis of Adecco . . . . . . . . . . . . . . . . . . . . 60

    4.3 Principal Component Analysis of Baer . . . . . . . . . . . . . . . . . . . . . 62

    4.4 Principal Component Analysis of Richemont . . . . . . . . . . . . . . . . . . 63

    4.5 Principal Component Analysis of Ciba . . . . . . . . . . . . . . . . . . . . . 65

    4.6 Principal Component Analysis of Clariant . . . . . . . . . . . . . . . . . . . 66

    4.7 Principal Component Analysis of Givaudan . . . . . . . . . . . . . . . . . . . 68

    4.8 Principal Component Analysis of Holcim . . . . . . . . . . . . . . . . . . . . 69

    4.9 Principal Component Analysis of Kudelski . . . . . . . . . . . . . . . . . . . 71

    4.10 Principal Component Analysis of Lonza . . . . . . . . . . . . . . . . . . . . . 72

    4.11 Principal Component Analysis of Swiss Re . . . . . . . . . . . . . . . . . . . 74

    4.12 Principal Component Analysis of Swisscom . . . . . . . . . . . . . . . . . . . 75

    4.13 Principal Component Analysis of Serono . . . . . . . . . . . . . . . . . . . . 76

    4.14 Principal Component Analysis of Surveillance . . . . . . . . . . . . . . . . . 77

    4.15 Principal Component Analysis of Sulzer . . . . . . . . . . . . . . . . . . . . 79

    4.16 Principal Component Analysis of Syngenta . . . . . . . . . . . . . . . . . . . 80

    4.17 Principal Component Analysis of Swatch Bearer Share . . . . . . . . . . . . 82

    4.18 Principal Component Analysis of Swatch Registered Share . . . . . . . . . . 83

    4.19 Principal Component Analysis of Unaxis . . . . . . . . . . . . . . . . . . . . 83

    4.20 General Results of the Principal Component Analysis . . . . . . . . . . . . . 85

    II Predicting Liquidity 87

    5 The Lead-Lag Behavior 91

    5.1 Autocorrelation in Liquidity Measures and Returns . . . . . . . . . . . . . . 91

    5.2 The Vector Autoregressive Model . . . . . . . . . . . . . . . . . . . . . . . . 92

    5.3 Results of the VAR model for Adecco . . . . . . . . . . . . . . . . . . . . . . 93

    5.4 Results of the VAR model for Baer . . . . . . . . . . . . . . . . . . . . . . . 96

    5.5 Results of the VAR model for Richemont . . . . . . . . . . . . . . . . . . . . 98

    5.6 Results of the VAR Model for Ciba . . . . . . . . . . . . . . . . . . . . . . . 101

    5.7 Results of the VAR Model for Clariant . . . . . . . . . . . . . . . . . . . . . 103

    5.8 Results of the VAR Model for Givaudan . . . . . . . . . . . . . . . . . . . . 105

    5.9 Results of the VAR Model for Holcim . . . . . . . . . . . . . . . . . . . . . . 107

    5.10 Results of the VAR Model for Kudelski . . . . . . . . . . . . . . . . . . . . . 110

    5.11 Results of the VAR Model for Lonza . . . . . . . . . . . . . . . . . . . . . . 112

    5.12 Results of the VAR Model for Swiss Re . . . . . . . . . . . . . . . . . . . . . 114

    5.13 Results of the VAR Model for Swisscom . . . . . . . . . . . . . . . . . . . . 116

  • CONTENTS ix

    5.14 Results of the VAR Model for Serono . . . . . . . . . . . . . . . . . . . . . . 118

    5.15 Results of the VAR Model for Surveillance . . . . . . . . . . . . . . . . . . . 121

    5.16 Results of the VAR Model for Sulzer . . . . . . . . . . . . . . . . . . . . . . 123

    5.17 Results of the VAR Model for Syngenta . . . . . . . . . . . . . . . . . . . . . 125

    5.18 Results of the VAR Model for Swatch Bearer Share . . . . . . . . . . . . . . 127

    5.19 Results of the VAR Model for Swatch Registered Share . . . . . . . . . . . . 129

    5.20 Results of the VAR Model for Unaxis . . . . . . . . . . . . . . . . . . . . . . 131

    5.21 General Results of the VAR Model . . . . . . . . . . . . . . . . . . . . . . . 133

    6 Prediction Models for Liquidity 137

    6.1 Predicting the Relative Spread . . . . . . . . . . . . . . . . . . . . . . . . . . 137

    6.2 Predicting Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

    6.3 Predicting Dollar Depth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

    6.4 Predicting Market Impact on the Ask-Side . . . . . . . . . . . . . . . . . . . 141

    6.5 Predicting Market Impact on the Bid-Side . . . . . . . . . . . . . . . . . . . 143

    6.6 Predicting the Liquidity Ratio 3 . . . . . . . . . . . .

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