Liquidity and asset pricing: evidence from a new free-float-adjusted price impact ratio

Huong Le and Andros Gregoriou

Journal of Economic Studies, 2021, vol. 49, issue 4, 751-771

Abstract: Purpose - This paper aims to empirically examine the relationship between stock liquidity and asset pricing, using a new price impact ratio adjusted for free float as the approximation of liquidity. The free-float-adjusted ratio is free from size bias and encapsulates the impact of trading frequency. It is more comprehensive than alternative price impact ratios because it incorporates the shares available to the public for trading. Design/methodology/approach - The authors are using univariate and multivariate econometric methods to test the significance of a newly created price impact ratio. The authors are using secondary data and asset pricing models in their analysis. The authors use a data sample of all US listed companies over the period of 1997–2017. Findings - The authors provide evidence that the free-float-adjusted price impact ratio is superior to all price impact ratios used in the previous academic literature. The authors also discover that their findings are robust to the financial crises between 2007 and 2009. Originality/value - This is the first comprehensive study on a newly established price impact ratio. The authors show the significance of this ratio and explain why it is superior to all previous price impact ratios, established in prior research.

Keywords: Price impact ratio; Amihud illiquidity ratio; Asset pricing; G10; G12 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-04-2021-0182

DOI: 10.1108/JES-04-2021-0182

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