The effects of non-trading on the illiquidity ratio

Patricia Chelley-Steeley, Neophytos Lambertides and James Steeley

Journal of Empirical Finance, 2015, vol. 34, issue C, 204-228

Abstract: Using a simulation analysis we show that non-trading can cause an overstatement of the observed illiquidity ratio. Our paper shows how this overstatement can be eliminated with a very simple adjustment to the Amihud illiquidity ratio. We find that the adjustment improves the relationship between the illiquidity ratio and measures of illiquidity calculated from transaction data. Asset pricing tests show that without the adjustment, illiquidity premia estimates can be understated by more than 17% for NYSE securities and by more than 24% for NASDAQ securities.

Keywords: Illiquidity ratio; Non-trading; Asset pricing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:34:y:2015:i:c:p:204-228

DOI: 10.1016/j.jempfin.2015.05.004

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