Abstract

http://ssrn.com/abstract=1558447
 
 

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What Are the Best Liquidity Proxies for Global Research?


Kingsley Y. L. Fong


University of New South Wales - School of Banking and Finance; Financial Research Network (FIRN)

Craig W. Holden


Indiana University - Kelley School of Business - Department of Finance

Charles Trzcinka


Indiana University - Kelley School of Business - Department of Finance

July 16, 2014


Abstract:     
We examine a relatively new global intraday equity dataset, Thomson Reuters Tick History (TRTH). We find that we can match a relatively high percentage of Datastream stock-years to TRTH and the database does well on several data integrity checks. Using TRTH data, we compare both monthly and daily liquidity proxies constructed from low-frequency (daily) stock data to corresponding liquidity benchmarks computed from high-frequency (intraday) data for 24,847 firms on 43 exchanges around the world on three performance dimensions: average cross-sectional correlation with the benchmarks, portfolio correlations with the benchmarks, and prediction accuracy. We find that for both monthly and daily frequencies Closing Percent Quoted Spread strongly dominates all other percent-cost proxies for global research. It has by-far the highest correlations with percent effective spread, percent quoted spread, percent realized spread, and percent price impact. It provides enormous performance gains over the monthly proxies that global research has used-to-date. At both daily and monthly frequencies, Closing Percent Quoted Spread also does the best job of capturing the level of percent effective spread and percent quoted spread. At both frequencies, High-Low does the best job of capturing the level of percent realized spread and percent price impact. These are the first findings at the daily frequency that liquidity proxies can perform well. We find that five proxies are nearly equivalent as the best monthly cost-per-volume proxies: Closing Percent Quoted Spread Impact, LOT Mixed Impact, High-Low Impact, FHT Impact, and Amihud. We find that the daily version of Amihud is the best daily cost-per-volume proxy. All of these cost-per-volume proxies are highly correlated with lambda, but none of them captures the level of lambda at either frequency.

Number of Pages in PDF File: 49

Keywords: Global, Liquidity, transaction costs, effective spread, price impact

JEL Classification: C15, G12, G20

working papers series


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Date posted: March 5, 2010 ; Last revised: July 17, 2014

Suggested Citation

Fong, Kingsley Y. L. and Holden, Craig W. and Trzcinka, Charles, What Are the Best Liquidity Proxies for Global Research? (July 16, 2014). Available at SSRN: http://ssrn.com/abstract=1558447 or http://dx.doi.org/10.2139/ssrn.1558447

Contact Information

Kingsley Y. L. Fong
University of New South Wales - School of Banking and Finance ( email )
Sydney, NSW 2052
Australia
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Craig W. Holden
Indiana University - Kelley School of Business - Department of Finance ( email )
Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)
HOME PAGE: http://www.kelley.iu.edu/cholden

Charles Trzcinka (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-9908 (Phone)
812-855-5875 (Fax)

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Citations:  9

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