Analysing liquidity and absorption limits of electronic markets with volume durations

Abstract

This paper focuses on the liquidity of electronic stock markets applying a sequential estimation approach of models for volume duration with increasing threshold values. A modified ACD model with a Box–Tukey transformation and a flexible generalized beta distribution is proposed to capture the changing cluster structure of duration processes. The estimation results with German XETRA data reveal the market's absorption limit for high volumes of shares, expanding the time costs of illiquidity when trading these quantities.