Do Liquidity Proxies Based on Daily Prices and Quotes Really Measure Liquidity?

This paper examines whether liquidity proxies based on different daily prices and quotes approximate latent liquidity. We compare percent-cost daily liquidity proxies with liquidity benchmarks as well as with realized variance estimates. Both benchmarks and volatility measures are obtained from high-frequency data. Our results show that liquidity proxies based on high-low-open-close prices are more correlated and display higher mutual information with volatility estimates than with liquidity benchmarks. The only percent-cost proxy that indicates higher dependency with liquidity benchmarks than with volatility estimates is the Closing Quoted Spread based on the last bid and ask quotes within a day. We consider different sampling frequencies for calculating realized variance and liquidity benchmarks, and find that our results are robust to it.

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