Stock Market Liquidity And Liquidity Risk

Liquidity, profitability, safety are three features of the stock market , and liquidity is a prerequisite for return. In this paper a new liquidity index has been proposed after making a study of different definitions of liquidity and the basic characteristics of the stock market. Related features of liquidity risks have been studied through the analysis of the index.The following are the main motivations and works: Firstly, liquidity index is usually defined by the relation of price fluctuation and trade volume within a period of time , but how can liquidities be influenced, when stock prices fluctuated violently or smoothly , even the trade volume is same , is still unknown. Under this circumstance a more proper index has been raised. Secondly, liquidity models are rarely analyzed from the angle of probability. Thus, this paper has been developed based on the assumption that stock prices follow geometric Brownian motion and trade volume observe the normal distribution , to calculate the probability distribution of liquidity and to study the character of liquidity. And the volatility of liquidity, i.e. variance has been defined as liquidity risk. By empirical test measures the liquidity risk. Finally, growing number of scholars question the normal distribution characteristics of stock prices, and proposed a more realistic power-law distribution. So in this paper, the stock prices are assumed to follow the power-law distribution. Also the distribution of liquidity is reanalyzed and liquidity risks are measured.