Trading volume forecast for an illiquid stock

August 8, 2011
By

(This article was first published on Quantitative thoughts » EN, and kindly contributed to R-bloggers)

When dealing with transaction cost analysis, a stock’s volume is assumed to be stable or foreseeable.  However, there is different picture, then we are dealing with an illiquid stock.

It is relatively easy to forecast the volume of a liquid stock, because trading volume has high autocorrelation – the volumes at t and t+1 are correlated. For example, let’s take a look at BPN Paribas stock  autocorrelation figure:

Photobucket

X axis shows the lag between the days and Y axis shows percentage of the correlation. For BNP Paribas stock we have 60 % correlation between t and t+1 and 30 % between t and t+2.

Now, let’s look what is autocorrelation  of an illiquid stock:

Photobucket

The figure above shows, that autocorrelation for this emerging market stock is zero. That means, that we can’t forecast tomorrow’s volume, based on today’s volume.

Imagine, that a portfolio manager has to liquidate 100 000 of illiquid stock where the median of daily volume is 4000 and participation rate has to be maximum 20 %. How many days it will take to liquidate the position?

Because the daily volume of the stock is very volatile, we need more randomness in our forecast. To do that, we can use bootstrap – let’s take the last 250 data-points of the volume and generate 10 000 or 100 000 new time series. Once the have a bunch of new time series, let’s check how many days it would take to liquidate 100 000 stock position in each. Finally, we collect the numbers of the days needed for liquidation  and form a new vector. The result is following:

Photobucket

The histogram above shows, that it will take maximum 80 days to liquidate 100 000 of illiquid stock with 95% confidence.

?View Code RSPLUS
#volume - vector of the stock's volume
#shareNumber - number of the shares to liquidate
#loop - number of the time-series to be created
#participationRate - what is going to be participation rate 
simNumberOfDays<-function(volume,shareNumber,loop=10000,participationRate=0.05)
{
  rez=matrix(nrow=loop)
  for(i in 1:loop)
  {
    x=nasa[sample(NROW(volume))]
    y=cumsum(x*participationRate)
    rez[i,]=which(y>shareNumber)[1]
  }
  return(rez)
}
rez=simNumberOfDays(illiquidStock,100000,10000,0.2)

To leave a comment for the author, please follow the link and comment on his blog: Quantitative thoughts » EN.

R-bloggers.com offers daily e-mail updates about R news and tutorials on topics such as: visualization (ggplot2, Boxplots, maps, animation), programming (RStudio, Sweave, LaTeX, SQL, Eclipse, git, hadoop, Web Scraping) statistics (regression, PCA, time series, trading) and more...



If you got this far, why not subscribe for updates from the site? Choose your flavor: e-mail, twitter, RSS, or facebook...

Tags: , , , , , , , ,

Comments are closed.