Mixture of distribution hypothesis: Analyzing daily liquidity frictions and information flows
Résumé
Two types of liquidity problems are distinguished, called respectively liquidity frictions and illiquidity events. The first one is related to orderimbalances that are resorbed within the trading day. It can be assimilated to “immediacy cost” and impacts the traded volume at the intraday anddaily frequencies while affecting the price increments only at the intraday periodicity. The second one is inherent to the long lasting liquidityproblems and is responsible for the time-dependence of the daily returns and volume. We extend the MDHL framework of Darolles to accountfor 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 illiquidityindicators.