Trade-Time Measures of Liquidity

Yashar H Barardehi, Dan Bernhardt and Ryan Davies

The Review of Financial Studies, 2019, vol. 32, issue 1, 126-179

Abstract: Dramatic microstructure changes in equity markets have made standard liquidity measures less accurate proxies for trading costs. We develop trade-time liquidity measures that reflect per-dollar price impacts of fixed-dollar volumes. Our measures better capture institutional trading costs and better explain the cross-section of returns than do standard measures, especially in recent years. Despite improvements in measures of market quality, expected trading costs have explanatory power for the cross-section of expected returns: we obtain monthly liquidity premium estimates of 5.3 bp for expected returns and 2.4 bp for risk-adjusted returns. Estimated premiums rise after the financial crisis and remain high thereafter. Received April 15, 2016; editorial decision December 24, 2017 by Editor Andrew Karolyi.

Date: 2019
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