Review of Financial Studies Vol. 32 No. 1 2019

Trade-Time Measures of Liquidity

Yashar H. Barardehi¹; Dan Bernhardt²; Ryan J. Davies³

¹ Chapman University and Ohio University · ² University of Illinois and University of Warwick · ³ Babson College

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.

DOI

10.1093/rfs/hhy012

Volume

32

Issue

1

Pages

126-179

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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