Liquidity, Information, and Infrequently Traded Stocks

Memo 1995-6

Posted: 27 Jul 1995

See all articles by David Easley

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

Nicholas M. Kiefer

Cornell University

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Joseph B. Paperman

Cornell University

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Abstract

Infrequently traded stocks tend to have higher bid-askspreads than frequently traded stocks. We use a new empirical technique to investigate the risk of information- based trading in active versus inactive stocks. We estimate the stochastic process of trades by maximum likelihood. Using a sample of NYSE stocks, we find that actively traded stocks have a much greater rate of uninformed trade. This suggests that the larger spreads are due at least in part to the higher risks associated with making a market in infrequently traded stocks.

JEL Classification: G12

Suggested Citation

Easley, David and Kiefer, Nicholas M. and O'Hara, Maureen and Paperman, Joseph B., Liquidity, Information, and Infrequently Traded Stocks. Memo 1995-6. Available at SSRN: https://ssrn.com/abstract=6526

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Cornell University - Department of Information Science ( email )

402 Bill & Melinda Gates Hall
Ithaca, NY 14853
United States

Nicholas M. Kiefer (Contact Author)

Cornell University ( email )

Building 350
Ithaca, NY 14853
United States
607-255-6315 (Phone)
607-539-6366 (Fax)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Joseph B. Paperman

Cornell University ( email )

Ithaca, NY 14853
United States

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