Price Impact or Trading Volume: Why is the Amihud (2002) Measure Priced?

73 Pages Posted: 10 Jul 2013 Last revised: 14 Mar 2017

See all articles by Xiaoxia Lou

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: February 28, 2017

Abstract

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

Lou, Xiaoxia and Shu, Tao, Price Impact or Trading Volume: Why is the Amihud (2002) Measure Priced? (February 28, 2017). Available at SSRN: https://ssrn.com/abstract=2291942 or http://dx.doi.org/10.2139/ssrn.2291942

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

Tao Shu (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

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