Trade-Time Measures of Liquidity. (21st March 2018)

• Record Type: Journal Article
• Authors: Barardehi, Yashar H; Bernhardt, Dan; Davies, Ryan J
• Is Part Of: Review of financial studies. Volume 32:Number 1(2019)
• Page Start: 126
• Page End: 179
• Publication Date: 2018-03-21
• Subjects: Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhy012
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: Dramatic microstructure changes in equity markets have made standard liquidity measures less accurate proxies for trading costs. We develop trade-time liquidity measures that reflect per-dollar price impacts of fixed-dollar volumes. Our measures better capture institutional trading costs and better explain the cross-section of returns than do standard measures, especially in recent years. Despite improvements in measures of market quality, expected trading costs have explanatory power for the cross-section of expected returns: we obtain monthly liquidity premium estimates of 5.3 bp for expected returns and 2.4 bp for risk-adjusted returns. Estimated premiums rise after the financial crisis and remain high thereafter. Received April 15, 2016; editorial decision December 24, 2017 by Editor Andrew Karolyi.