Run Lengths and Liquidity

30 Pages Posted: 11 Nov 2007 Last revised: 25 Sep 2015

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Paul Hanouna

Villanova University - School of Business

Date Written: October 5, 2007

Abstract

We develop a theoretical framework of equity returns to hypothesize that average run lengths are related to common measures of liquidity such as trading volume and trade price-impact. This relationship holds irrespective of the observation frequency in the computation of run lengths. Thus, liquidity can be detected by examining a stock's run length signature. Tests using daily equity return data for all stocks over the period 1962-2005 find that run lengths are decreasing in turnover, and increasing with bid-ask spreads, and price-impact. We develop a market-wide illiquidity factor based on run lengths and find that it is priced using standard asset-pricing specifications.

Keywords: run length, liquidity, liquidity risk, asset pricing

Suggested Citation

Das, Sanjiv Ranjan and Hanouna, Paul E., Run Lengths and Liquidity (October 5, 2007). Annals of Operation Research, Vol. 176, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1028731 or http://dx.doi.org/10.2139/ssrn.1028731

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Paul E. Hanouna (Contact Author)

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

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