How should liquidity be measured?

Previous literature has adopted a broad range of measures to proxy for market liquidity, suggesting that there is no consensus about the most appropriate measure. The various measures used fall into two broad categories: trade-based measures and order-based measures. This paper reports that there is little correlation between the two. This suggests that the choice of measure may have a significant effect on research outcomes and therefore policy decisions. By examining changes in these two different measurement proxies before and after the commencement of the economic crisis on the Jakarta Stock Exchange (JSX), this paper provides evidence that order-based measures of liquidity provide a better proxy for liquidity. We also employ a new measure of liquidity, which captures the bid-ask spread, the order depth and the probability of order execution. The paper provides evidence of the value of this type of measure in assessing the impact of changes made to market structure.