Tracking Illiquidities in Intradaily and Daily Characteristics

In this article, we distinguish between two types of liquidity problems called respectively liquidity frictions and illiquidity events. The first one is related to order imbalances that are resorbed within the trading day. It can be assimilated to "immediacy cost" and impacts the traded volume at the intraday and daily frequencies while affecting the price increments only at the intraday periodicity. The second one is inherent to the long lasting liquidity problems and is responsible for the time-dependence of the daily returns. We extend the MDHL framework of Darolles et al. (2010) to account for the presence of the illiquidity events. We then propose a two-step signal extraction formulation of the MDHL model in order to separate the two liquidity problem impacts on the daily returns and volume. We also provide, for a set of FTSE100 individual stocks, long lasting illiquidity indicators.no