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Trade-time based measures of liquidity

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Barardehi, Yashar H., Bernhardt, Dan and Davies, Ryan J. (2019) Trade-time based measures of liquidity. Review of Financial Studies, 32 (1). pp. 126-179. doi:10.1093/rfs/hhy012

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Official URL: https://doi.org/10.1093/rfs/hhy012

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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.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Liquidity (Economics) -- Mathematical models, Stock exchanges
Journal or Publication Title: Review of Financial Studies
Publisher: Oxford University Press
ISSN: 0893-9454
Official Date: January 2019
Dates:
DateEvent
January 2019Published
21 March 2018Available
5 January 2018Accepted
Volume: 32
Number: 1
Page Range: pp. 126-179
DOI: 10.1093/rfs/hhy012
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
Paul Boltz FellowshipUniversity of Illinoishttp://dx.doi.org/10.13039/100010443
Babson Faculty Research FundBabson Collegehttp://dx.doi.org/10.13039/100011553
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