Which stock price component drives the Amihud illiquidity premium?

Jinyong Kim and Yongsik Kim

The North American Journal of Economics and Finance, 2023, vol. 64, issue C

Abstract: We examine the components of stock prices that play a key role in the pricing of the Amihud (2002) illiquidity measure. We first decompose the stock price series into permanent and transitory components and then construct the half-Amihud illiquidity measures on the days of positive and negative permanent price returns. We find that the transitory half-Amihud measure on the days of negative permanent price returns plays an important role in pricing the Amihud illiquidity even after controlling for the turnover ratio. This finding contrasts with that of Lou and Shu (2017) in that both the trading volume component and transitory price impact, drive the Amihud illiquidity premium.

Keywords: Amihud illiquidity premium; Permanent and transitory prices; Half-Amihud measure (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:64:y:2023:i:c:s106294082200211x

DOI: 10.1016/j.najef.2022.101876

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