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

McManus, Ian D.; Smith, Peter N.; Thomas, Steve

doi:10.2139/ssrn.1302850

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

21st Australasian Finance and Banking Conference 2008 Paper

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: 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