Trade-Time Measures of Liquidity

The Review of Financial Studies (32)1, 126-179

67 Pages Posted: 20 Mar 2016 Last revised: 18 Dec 2020

See all articles by Yashar H. Barardehi

Yashar H. Barardehi

Chapman University - The George L. Argyros School of Business & Economics

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Ryan J. Davies

Babson College - Finance Division

Date Written: November 1, 2017

Abstract

Dramatic microstructure changes in equity markets have made standard liquidity measures less accurate proxies of trading costs. We develop trade-time liquidity measures that reflect per-dollar price impacts of fixed-dollar volumes. Our measures (i) better capture institutional trading costs; and (ii) better explain the cross-section of returns than do standard measures, e.g., quoted and effective spreads, estimates of Kyle's λ, and Amihud's (2002) measure, especially in more recent years. Despite improvements in measures of market quality, expected trading costs still have explanatory power for the cross-section of expected returns for NYSE-listed stocks: we obtain monthly liquidity premium estimates of 5.3bp for expected returns and 2.4bp for risk-adjusted returns. Liquidity premiums rise after the financial crisis and remain consistently high thereafter.

Keywords: Liquidity, Trading costs, Trade time, Liquidity premium

JEL Classification: G12, G14

Suggested Citation

Barardehi, Yashar and Bernhardt, Dan and Davies, Ryan J., Trade-Time Measures of Liquidity (November 1, 2017). The Review of Financial Studies (32)1, 126-179, Available at SSRN: https://ssrn.com/abstract=2749732 or http://dx.doi.org/10.2139/ssrn.2749732

Yashar Barardehi (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

HOME PAGE: http://sites.google.com/site/barardehi/

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Ryan J. Davies

Babson College - Finance Division ( email )

220 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-5345 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/rdavies/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
365
Abstract Views
2,024
rank
102,473
PlumX Metrics