Commodity Liquidity Measurement and Transaction Costs

We examine the performance of liquidity proxies in commodities. The Amihud measure has the largest correlation with liquidity benchmarks. Amivest and Effective Tick measures also perform well. These proxies are useful for studies of commodity liquidity over a long time period and those that lack access to high-frequency data. We use various aspects of transaction costs, such as spread, depth, immediacy, and resiliency, to give insight into the costs of different execution approaches. Transaction costs increase with volatility and ex-hibit mean reversion. Splitting trades over one hour can reduce trading costs by two-thirds compared to an immediate execution. (JEL G11, G12, G13) Liquidity plays a crucial role in many empirical studies, so it is important that researchers measure it accurately. The purposes of this article are two-fold: (1) to identify the liquidity proxies that best capture the costs of trading com-modities; and (2) to document actual transaction costs of commodities for different trade sizes and order execution approaches. Numerous liquidity prox-ies based on daily data have been developed in the last few decades to as-sist researchers in studies that require liquidity measures over a long period