Research on the Relationship between Liquidity and Volatility

This paper establishes a model of duration, spread and volatility based on irreg ular time series to find out the relationship between liquidity and volatility. The result suggests that the two measurements of transaction frequency and trans action cost for liquidity and volatility interact significantly. So the manageme nt should reduce the transaction costs to prevent extreme volatility, supply eno ugh liquidity and keep the price stable.