Fat Tails and Slumping Shoulders: Kurtosis and the Market Microstructure of Daily Stock Return

Abstract:     
We study the relation between liquidity costs and the kurtosis of daily stock returns for size-based portfolios of NYSE/AMEX stocks from 1964 to 2003. We document a robust, positive, and significant relation between the liquidity costs of trade and the kurtosis of daily stock return distributions. This relation holds for most standard measures of liquidity costs, as well as with simple proxies for liquidity costs such as stock price and firm size. The relation is also confirmed by the shift in kurtosis accompanying stock splits and by the relation between kurtosis and stock splits observed in non-U.S. stock markets.

Keywords: Asset pricing anomalies, daily return, kurtosis, liquidity costs, transaction

JEL Classifications: G23, G32, G34

Working Paper Series