Adam Smith Business School

Professor Oliver Linton, University of Cambridge

"Dynamic Autoregressive Liquidity and Stock Splits"
Friday, 29 September. 3 pm
Room 709 AB, Boyd Orr Building

Abstract

We introduce a new class of semiparametric dynamic autoregressive models for the Amihud illiquidity measure, which captures both the long-run trend in the illiquidity series with a nonparametric component and the short-run dynamics with an autoregressive component. We develop a GMM estimator based on conditional moment restrictions and an efficient semiparametric ML estimator based on an i.i.d. assumption. We derive large sample properties for our estimators. We further develop a methodology to detect the occurrence of permanent and transitory breaks in the illiquidity process. Finally, we demonstrate the model performance and its empirical relevance on two applications. First, we study the impact of stock splits on the illiquidity dynamics of the five largest US technology company stocks. Second, we investigate how the different components of the illiquidity process obtained from our model relate to the stock market risk premium using data on the S&P 500 stock market index.

Bio

Oliver Linton is a fellow of Trinity College and is Professor of Political Economy at Cambridge University. Formerly, Professor of Econometrics at the London School of Economics and Professor of Economics at Yale University. He obtained his PhD in Economics from the University of California at Berkeley in 1991. He has published two books and more than a hundred articles on econometrics, statistics, and empirical finance. In 2015 he was a recipient of the Humboldt Research Award of the Alexander von Humboldt Foundation. He was Co-editor at the Journal of Econometrics between 2014 and 2019. He is a Fellow of: the Econometric Society, the Institute of Mathematical Statistics, and the British Academy. He was President of the Society for Financial Econometrics from 2021-2023. He was a lead expert in the U.K. Government Office for Science Foresight project: “The future of Computer Trading in Financial Markets”, which published in 2012. He has appeared as an expert witness in several cases involving market manipulation.

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First published: 18 September 2023