Sell-Order Illiquidity and the Cross-Section of Expected Stock Returns

Brennan, Michael J.; Chordia, Tarun; Subrahmanyam, Avanidhar; Tong, Qing

doi:10.2139/ssrn.1396328

Sell-Order Illiquidity and the Cross-Section of Expected Stock Returns

Journal of Financial Economics (JFE), Forthcoming

49 Pages Posted: 5 May 2009 Last revised: 14 Nov 2013

See all articles by Michael J. Brennan

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

Tarun Chordia

Emory University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Qing Tong

Shanghai LiLi Technology Co.,Ltd.

Date Written: March 7, 2012

Abstract

We estimate buy- and sell-order illiquidity measures (lambdas) for a comprehensive sample of NYSE stocks. We show that sell-order liquidity is priced more strongly than buy-order liquidity in the cross-section of equity returns. Indeed, our analysis indicates that the liquidity premium in equities emanates predominantly from the sell-order side. We also find that the average difference between sell and buy lambdas is generally positive throughout our sample period. Both buy and sell lambdas are significantly positively correlated with measures of funding liquidity such as the TED spread as well option implied volatility. .

Keywords: Liquidity, Kyle Lambda, Trading costs, Asset pricing

JEL Classification: G12, G14

Suggested Citation: Suggested Citation

Brennan, Michael John and Chordia, Tarun and Subrahmanyam, Avanidhar and Tong, Qing, Sell-Order Illiquidity and the Cross-Section of Expected Stock Returns (March 7, 2012). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1396328 or http://dx.doi.org/10.2139/ssrn.1396328