Are Volatility Over Volume Liquidity Proxies Useful for Global or US Research?

60 Pages Posted: 20 Jun 2017 Last revised: 6 Mar 2018

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance; Financial Research Network (FIRN)

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Ondrej Tobek

University of Cambridge - Faculty of Economics

Date Written: March 4, 2018

Abstract

We examine a general class of volatility over volume liquidity proxies as computed from low frequency (daily) data. We start from the Kyle and Obizhaeva (2016) hypothesis of transaction cost invariance to identify a new volatility over volume liquidity proxy “VoV(%Spread)” for percent spread cost and a new volatility over volume liquidity proxy “VoV(λ)” for the slope of the transaction cost function “λ”. We test the monthly and daily versions of these new and existing liquidity proxies against liquidity benchmarks as estimated from high frequency (intraday) data on both a global and US basis. We find that both the monthly and daily versions of VoV(λ) dominate the equivalent versions of Amihud and other cost-per-dollar-volume proxies on both a global and US basis. We also find that both the monthly and daily versions of VoV(%Spread) dominate the equivalent versions of other percent-cost proxies for US studies that cover pre-1993 years. In a case study, we find that our new VoV liquidity proxies yield different research inferences than the best previous liquidity proxies from the prior literature. The success of our invariance-based liquidity proxies across exchanges and over time supports the prediction of Kyle and Obizhaeva of a specific functional form for transaction costs across exchanges and over time.

Keywords: Liquidity, Transaction Cost Invariance, Effective Spread, Lambda

JEL Classification: C15, G12, G20

Suggested Citation

Fong, Kingsley Y. L. and Holden, Craig W. and Tobek, Ondrej, Are Volatility Over Volume Liquidity Proxies Useful for Global or US Research? (March 4, 2018). Kelley School of Business Research Paper No. 17-49. Available at SSRN: https://ssrn.com/abstract=2989367 or http://dx.doi.org/10.2139/ssrn.2989367

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Craig W. Holden (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

Ondrej Tobek

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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