Liquidity as Price Effect on Time to Sale

Keunkwan Ryu and Hyun-yeol Shin
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Keunkwan Ryu: Seoul National University
Hyun-yeol Shin: The Bank of Korea

Korean Economic Review, 2010, vol. 26, 307-340

Abstract: This paper proposes a new empirical measure of liquidity, termed “liquidity delta.†An asset is considered liquid if it can be traded quickly, in large quantities at low cost with little impact on market price. Trade-off between asking price and sale intensity, is one of the most common characteristics of assets. The new measure, liquidity delta, empirically captures this trade-off. We estimate liquidity delta for sixty major stocks listed on the Korea Stock Exchange. We demonstrate that liquidity delta is a useful measure of liquidity, with liquidity level and its variability showing negative and positive relation, respectively, with the asset's rate of return. The negative relationship shows premium for lack of liquidity whereas the positive one shows premium for liquidity risk.

Keywords: Liquidity; Excess asking price; Duration analysis; Hazard ratio; Liquidity delta (search for similar items in EconPapers)
JEL-codes: C41 G11 G12 G19 (search for similar items in EconPapers)
Date: 2010
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