Trading Frequency and Asset Pricing on the London Stock Exchange: Evidence from a New Price Impact Ratio

53 Pages Posted: 22 Jun 2010 Last revised: 2 Oct 2012

See all articles by Chris Florackis

Chris Florackis

University of Liverpool (UK)

Andros Gregoriou

University of East Anglia

Alexandros Kostakis

University of Liverpool Management School; University of Manchester - Manchester Business School

Date Written: June 1, 2011

Abstract

In this study we propose a new price impact ratio as an alternative to the widely used Amihud’s (2002) Return-to-Volume ratio (RtoV). This new measure, which is deemed Return-to-Turnover ratio (RtoTR), essentially modifies RtoV by substituting trading volume in its denominator with the turnover ratio for each security. We demonstrate that the new price impact ratio has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991-2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of size bias. More importantly, it encapsulates the stocks' cross-sectional variability in trading frequency, a relatively neglected but important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock prices by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.

Keywords: Trading Frequency, Transaction Costs, Price Impact Ratio, Asset Pricing, Illiquidity

JEL Classification: G10, G12, G14

Suggested Citation

Florackis, Chris and Gregoriou, Andros and Kostakis, Alexandros, Trading Frequency and Asset Pricing on the London Stock Exchange: Evidence from a New Price Impact Ratio (June 1, 2011). Journal of Banking and Finance, 2011, Vol. 35, pp. 3335-3350. Available at SSRN: https://ssrn.com/abstract=1628108 or http://dx.doi.org/10.2139/ssrn.1628108

Chris Florackis

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

Andros Gregoriou

University of East Anglia ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Alexandros Kostakis (Contact Author)

University of Liverpool Management School ( email )

Chatham Building
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.alexkostakis.com

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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