Transaction Costs and Liquidity: An Empirical Investigation

Posted: 11 Feb 1998

See all articles by Michael J. Barclay

Michael J. Barclay

University of Rochester - Simon School (Deceased)

Leslie M. Marx

Duke University - Fuqua School of Business, Economics Group

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 18, 1997

Abstract

We study the effects of changes in bid-ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex, and stocks move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is much larger when Nasdaq market makers avoid odd-eighths quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is much larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs (bid-ask spreads) significantly reduce trading volume, but do not have significant effects on prices.

JEL Classification: G12, G14

Suggested Citation

Barclay, Michael J. and Marx, Leslie M. and Kandel, Eugene, Transaction Costs and Liquidity: An Empirical Investigation (November 18, 1997). Available at SSRN: https://ssrn.com/abstract=58689

Michael J. Barclay (Contact Author)

University of Rochester - Simon School (Deceased)

N/A

Leslie M. Marx

Duke University - Fuqua School of Business, Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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