EXcess Idle Time

64 Pages Posted: 12 Jan 2013 Last revised: 25 Apr 2017

Federico M. Bandi

Johns Hopkins University - Carey Business School

Davide Pirino

Dipartimento di Economia e Finanza, Università degli Studi di Roma "Tor Vergata"

Roberto Renò

University of Verona - Department of Economics

Date Written: January 21, 2017

Abstract

We introduce a novel economic indicator, named excess idle time (EXIT), measuring the extent of sluggishness in observed financial prices. Using a complete limit theory, we provide econometric support for the fact that high-frequency transaction prices are, coherently with liquidity and asymmetric information theories of price determination, generally stickier than implied by the ubiquitous semimartingale assumption. EXIT provides, for every asset and each trading day, a proxy for the extent of frictions (liquidity and asymmetric information) which is conceptually different from traditional price-impact measures. We relate it to existing measures and show its favorable performance under realistic data generating processes. We conclude by showing that EXIT uncovers an economically-meaningful short-term and long-term liquidity premium in market returns.

Keywords: Liquidity, asymmetric information, transaction cost, liquidity premium

JEL Classification: G10, C12

Suggested Citation

Bandi, Federico M. and Pirino, Davide and Renò, Roberto, EXcess Idle Time (January 21, 2017). Available at SSRN: https://ssrn.com/abstract=2199468 or http://dx.doi.org/10.2139/ssrn.2199468

Federico Maria Bandi

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Davide Pirino

Dipartimento di Economia e Finanza, Università degli Studi di Roma "Tor Vergata" ( email )

Via Columbia 2
Rome, Lazio 00133
Italy

Roberto Renò (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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