PT - JOURNAL ARTICLE AU - Robert A. Schwartz AU - Reto Francioni AU - Peter Weber TI - Market Liquidity: <em>An Elusive Variable</em> AID - 10.3905/jpm.2020.1.174 DP - 2020 Jul 20 TA - The Journal of Portfolio Management PG - jpm.2020.1.174 4099 - https://pm-research.com/content/early/2020/07/20/jpm.2020.1.174.short 4100 - https://pm-research.com/content/early/2020/07/20/jpm.2020.1.174.full AB - Equity prices depend on risk, expected return, and market liquidity. Market liquidity, however, is an elusive variable. Prevailing thinking relates primarily to revealed liquidity (e.g., posted orders). The authors propose the concept of latent liquidity to complement this definition and discuss liquidity in terms of its empirical assessment, dependence on market structure, and effect on asset pricing. Regarding regulatory policy concerning market structure, the objective should be to enhance market quality, which is tantamount to liquidity provision. This should lead to extended economic benefits because one thing is widely agreed on: All financial markets would benefit from being more liquid.TOPICS: Portfolio theory, portfolio construction, equity portfolio managementKey Findings• The title itself says it: Liquidity is an elusive variable. It is hard to define, measure, and find.• A large and important component of liquidity is latent liquidity: orders that are not posted on a lit book. Consequently, it is not possible to quantify liquidity empirically.• Illiquidity leaves its footprints in the transaction record: accentuated intraday price volatility and returns autocorrelation. These are affected by the structural design of a financial market and by market structure regulation.