Price Impact or Trading Volume: Why is the Amihud (2002) Measure Priced?
73 Pages Posted: 10 Jul 2013 Last revised: 14 Mar 2017
Date Written: February 28, 2017
The return premium associated with the Amihud (2002) measure is generally considered a liquidity premium that compensates for price impact. We find that the pricing of the Amihud measure is not attributable to the construction of the return-to-volume ratio that is intended to capture price impact, but driven by the trading volume component. Additionally, the high-frequency price impact and spread benchmarks are priced only in January and do not explain the pricing of the trading volume component of the Amihud measure. Further analyses suggest that the volume effect on stock return is likely due to mispricing, not compensation for illiquidity.
Keywords: Amihud illiquidity measure, trading volume, price impact, liquidity premium
JEL Classification: G12
Suggested Citation: Suggested Citation