The Pricing Discount for Limited Liquidity: Evidence from the Swx Swiss Exchange and the NASDAQ
42 Pages Posted: 18 Sep 2003
Date Written: September 6, 2003
We investigate the pricing discount for limited liquidity. Unlike previous studies that have examined the relation between historical returns and liquidity, ours looks directly at current stock prices. This approach requires less data and yields up-to-date information about limited liquidity discounts. We analyze data from the SWX Swiss Exchange and the NASDAQ during 1995-2001, and find a statistically and economically significant price-liquidity relation in both markets. We test the robustness of that relation with a procedure that does not rely on specific distributional assumptions. Our findings are unaffected. Accordingly, the discount suffered by the least liquid securities is about 30%.
Keywords: Liquidity, Asset pricing, Bid-ask spread
JEL Classification: G12, G31
Suggested Citation: Suggested Citation