Editing Liquidity risk (section)

==Measures of asset liquidity==

===Bid–ask spread===
The [[bid–ask spread]] is used by market participants as an asset liquidity measure. To compare different products the ratio of the spread to the product's bid price can be used. The smaller the ratio the more liquid the asset is.

This spread is composed of operational, administrative, and processing costs as well as the compensation required for the possibility of trading with a more informed trader.

===Market depth===
Hachmeister refers to [[market depth]] as the amount of an asset that can be bought and sold at various bid–ask spreads. [[Slippage (finance)|Slippage]] is related to the concept of market depth. Knight and Satchell mention a flow trader needs to consider the effect of executing a large order on the market and to adjust the bid–ask to spread accordingly. They calculate the liquidity cost as the difference of the execution price and the initial execution price.

===Immediacy===
Immediacy refers to the time needed to successfully trade a certain amount of an asset at a prescribed cost.

===Resilience===
Hachmeister identifies the fourth dimension of liquidity as the speed with which prices return to former levels after a large transaction. Unlike the other measures, resilience can only be determined over a period of time, i.e., resilience is the capacity to recover.