Liquidity, Information, and Infrequently Traded Stocks
Posted: 27 Jul 1995
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: Suggested Citation