The Night and Day of Amihud's (2002) Liquidity Measure

The Review of Asset Pricing Studies 11 (2), 269-308

57 Pages Posted: 26 Feb 2019 Last revised: 12 Jul 2021

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

Thomas Ruchti

Carnegie Mellon University - Department of Accounting

Marc Weidenmier

Claremont McKenna College - Robert Day School of Economics and Finance; National Bureau of Economic Research (NBER)

Date Written: February 15, 2019

Abstract

Amihud's (2002) stock (il)liquidity measure averages daily ratios of absolute close-to-close return to dollar volume, including overnight returns, while trading volumes come from regular hours. Our modified measure addresses this mismatch by using open-to-close returns. It is more strongly correlated with standard trading-cost measures (by 8-37%) and it better explains cross-sections of returns, doubling estimated liquidity premia. Using non-synchronous trading near close as an instrument reveals that overnight returns are primarily information-driven and orthogonal to price impacts of trading: including them in liquidity proxies magnifies measurement error, understating liquidity premia. Our modification helps wherever use of Amihud's measure is required. Our measures are publicly available to researchers for the years 1964-2019, and can be updated in future years using CRSP and COMPUSTAT.

Keywords: Amihud (2002), Liquidity Premia, Overnight Returns, Non-synchronous Trading

JEL Classification: G12, G14

Suggested Citation

Barardehi, Yashar and Bernhardt, Dan and Ruchti, Thomas and Weidenmier, Marc D., The Night and Day of Amihud's (2002) Liquidity Measure (February 15, 2019). The Review of Asset Pricing Studies 11 (2), 269-308, Available at SSRN: https://ssrn.com/abstract=3335508 or http://dx.doi.org/10.2139/ssrn.3335508

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)

Thomas Ruchti

Carnegie Mellon University - Department of Accounting ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

Marc D. Weidenmier

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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