Trading Probability and Turnover as Measures of Liquidity Risk: Evidence from the U.K. Stock Market

7 Pages Posted: 17 Nov 2008 Last revised: 7 Jan 2009

See all articles by Ian D. McManus

Ian D. McManus

University of Southampton - School of Management

Peter N. Smith

University of York - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Steve Thomas

City University London - Sir John Cass Business School

Date Written: September 9, 2008

Abstract

This paper utilises monthly data from the U.K. stock market to examine possible regularities in variables (trading probability and fractional turnover) which may be (or may be hypothesised to be) associated with liquidity risk. Modelling is based upon extensions to the CAPM involving variables closely similar to those employed in the Fama-French three factor model (albeit using Dividend Yield in place of the Book to Market ratio). Our findings suggest that the measure of trading probability used here is a close substitute for the market capitalisation measure associated with the 'Size' effect; and that the fractional turnover variable makes a significant contribution as an addendum to a three factor model.

Keywords: Liquidity, Trading Probability, Turnover

JEL Classification: G12, G15

Suggested Citation

McManus, Ian D. and Smith, Peter N. and Thomas, Stephen H., Trading Probability and Turnover as Measures of Liquidity Risk: Evidence from the U.K. Stock Market (September 9, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1302850 or http://dx.doi.org/10.2139/ssrn.1302850

Ian D. McManus (Contact Author)

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

Peter N. Smith

University of York - Department of Economics and Related Studies ( email )

Heslington
York 010 5DD
United Kingdom
+44 1904 433 765 (Phone)
+44 1904 433 759 (Fax)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Stephen H. Thomas

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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