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
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: Suggested Citation
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