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Price impact and asset pricing

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  • Huh, Sahn-Wook

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.

Suggested Citation

  • Huh, Sahn-Wook, 2014. "Price impact and asset pricing," Journal of Financial Markets, Elsevier, vol. 19(C), pages 1-38.
    • Handle: RePEc:eee:finmar:v:19:y:2014:i:c:p:1-38
    DOI: 10.1016/j.finmar.2013.02.001
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    5. Szymon Stereńczak, 2020. "State-Dependent Stock Liquidity Premium: The Case of the Warsaw Stock Exchange," IJFS, MDPI, vol. 8(1), pages 1-24, March.
    6. Kitamura, Yoshihiro, 2016. "Does the simple microstructure model tell the time of the FX intervention? A one day analysis of the Japanese FX intervention," Research in International Business and Finance, Elsevier, vol. 36(C), pages 436-446.
    7. Cakici, Nusret & Zaremba, Adam, 2021. "Liquidity and the cross-section of international stock returns," Journal of Banking & Finance, Elsevier, vol. 127(C).
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    9. Michael J. Brennan & Sahn-Wook Huh & Avanidhar Subrahmanyam, 2016. "Asymmetric Effects of Informed Trading on the Cost of Equity Capital," Management Science, INFORMS, vol. 62(9), pages 2460-2480, September.
    10. Stereńczak, Szymon, 2020. "Stock liquidity premium with stochastic price impact and exogenous trading strategy," International Review of Financial Analysis, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Price-impact parameters; Order flows; High-frequency-based measures; Illiquidity; Adverse-selection; Asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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