Price impact and asset pricing

Sahn-Wook Huh

Journal of Financial Markets, 2014, vol. 19, issue C, 1-38

Abstract: Using intradaily order flows processed via the Lee and Ready (1991) algorithm for NYSE/AMEX-listed stocks over the past 27 years, I estimate a set of price-impact parameters. The results provide strong evidence that price impact is priced in the cross-section of stock returns, even after controlling for risk factors, firm characteristics, and other low-frequency-based illiquidity proxies prevalent in the literature. While the Amihud (2002) measure is the best proxy of its kind, no low-frequency-based proxies can parallel the price-impact parameters. This suggests that price impact as a measure of illiquidity can be estimated more precisely by intradaily order flows, because it incorporates incremental information that comes out of high-frequency data. Therefore, price impact does a better job in capturing the return premium for illiquidity.

Keywords: Price-impact parameters; Order flows; High-frequency-based measures; Illiquidity; Adverse-selection; Asset pricing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:19:y:2014:i:c:p:1-38

DOI: 10.1016/j.finmar.2013.02.001

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