Title: Implied liquidity: towards stochastic liquidity modelling and liquidity trading

Authors: José Manuel Corcuera; Florence Guillaume; Dilip B. Madan; Wim Schoutens

Addresses: Facultat de Matemátiques, Universitat de Barcelona, Gran Via de les Corts Catalanes 585, Barcelona 08007, Spain. ' Department of Mathematics, Katholieke Universiteit Leuven, W. de Croylaan 54B-3001 Leuven, Belgium. ' Robert H. Smith School of Business, University of Maryland, 4409 Van Munching Hall, Maryland, USA. ' Department of Mathematics, Katholieke Universiteit Leuven, W. de Croylaan 54B-3001 Leuven, Belgium

Abstract: In this paper the authors introduce the new concept of implied liquidity based on the recent developed two-way price theory (conic finance). Implied liquidity isolates and quantifies liquidity risk in financial markets. It is shown on real market option data on the major US indices how liquidity dried up in the troubled year end of 2008. These investigations open the door to stochastic liquidity modelling, liquidity derivatives and liquidity trading.

Keywords: conic finance; stochastic liquidity; liquidity trading; liquidity derivatives; stochastic modelling; two-way price theory; implied liquidity; liquidity risk; financial markets.

DOI: 10.1504/IJPAM.2012.046910

International Journal of Portfolio Analysis and Management, 2012 Vol.1 No.1, pp.80 - 91

Published online: 23 Aug 2014 *