Theory-Based Illiquidity and Asset Pricing

Posted: 8 Sep 2009

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Sahn-Wook Huh

State University of New York (SUNY) - Department of Finance

Avanidhar Subrahmanyam

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 2009

Abstract

Many proxies of illiquidity have been used in the literature that relates illiquidity to asset prices. These proxies have been motivated from an empirical standpoint. In this study, we approach liquidity estimation from a theoretical perspective. Our method explicitly recognizes the analytic dependence of illiquidity on more primitive drivers such as trading activity and information asymmetry. More specifically, we estimate illiquidity using structural formulae in line with Kyle's (1985) lambda for a comprehensive sample of stocks. The empirical results provide evidence that theory-based estimates of illiquidity are priced in the cross-section of expected stock returns, even after accounting for risk factors, firm characteristics known to influence returns, and other illiquidity proxies prevalent in the literature.

Keywords: G12, G14

Suggested Citation

Chordia, Tarun and Huh, Sahn-Wook and Subrahmanyam, Avanidhar, Theory-Based Illiquidity and Asset Pricing (September 2009). The Review of Financial Studies, Vol. 22, Issue 9, pp. 3629-3668, 2009. Available at SSRN: https://ssrn.com/abstract=1468197 or http://dx.doi.org/hhn121

Tarun Chordia (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Sahn-Wook Huh

State University of New York (SUNY) - Department of Finance ( email )

347 Jacobs Management Center
Buffalo, 14260-4000
United States
716-645-5435 (Phone)
716-645-3823 (Fax)

HOME PAGE: https://sites.google.com/site/sahnwookhuh/home

Avanidhar Subrahmanyam

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

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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