64 Pages Posted: 12 Jan 2013 Last revised: 25 Apr 2017
Date Written: January 21, 2017
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: Suggested Citation