Liquidity Premium, Liquidity-Adjusted Return and Volatility, and Extreme Liquidity
Abstract
We establish innovative liquidity premium measures, and construct liquidity-adjusted return and volatility to model assets with extreme liquidity, represented by a portfolio of selected crypto assets, and upon which we develop a set of liquidity-adjusted ARMA-GARCH/EGARCH models. We demonstrate that these models produce superior predictability at extreme liquidity to their traditional counterparts. We provide empirical support by comparing the performances of a series of Mean Variance portfolios.
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