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Do Liquidity Measures Measure Liquidity?

68 Pages Posted: 24 Mar 2008 Last revised: 2 Sep 2017

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Charles Trzcinka

Indiana University - Kelley School of Business - Department of Finance

Date Written: February 21, 2008

Abstract

Liquidity plays an increasingly important role in empirical asset pricing, market efficiency, and corporate finance. Identifying high quality proxies for liquidity based on daily data only (not intraday data) would permit liquidity to be studied over relatively long timeframes and across many countries. We introduce new liquidity measures. We run horseraces of both monthly and annual liquidity measures. Our benchmarks are effective spread, realized spread, and price impact based on both TAQ and Rule 605 data, including the decimals era. We identify the best proxies in each case and find that the new liquidity measures win the majority of horseraces.

Keywords: Liquidity, transaction costs, effective spread, price impact, asset pricing

JEL Classification: C15, G12, G20

Suggested Citation

Goyenko, Ruslan and Holden, Craig W. and Trzcinka, Charles, Do Liquidity Measures Measure Liquidity? (February 21, 2008). Journal of Financial Economics (JFE), Vol. 92, No. 153-181, 2009. Available at SSRN: https://ssrn.com/abstract=1108553 or http://dx.doi.org/10.2139/ssrn.1108553

Ruslan Goyenko

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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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