Trade-time measures of liquidity

Yashar H. Barardehi, Dan Bernhardt, Ryan J. Davies

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)129-179
Number of pages51
JournalReview of Financial Studies
Volume32
Issue number1
DOIs
StatePublished - 2019

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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