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Do liquidity measures measure liquidity?

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  • Goyenko, Ruslan Y.
  • Holden, Craig W.
  • Trzcinka, Charles A.

Abstract

Given the key role of liquidity in finance research, identifying high quality proxies based on daily (as opposed to intraday) data would permit liquidity to be studied over relatively long timeframes and across many countries. Using new measures and widely employed measures in the literature, we run horseraces of annual and monthly estimates of each measure against liquidity benchmarks. Our benchmarks are effective spread, realized spread, and price impact based on both Trade and Quote (TAQ) and Rule 605 data. We find that the new effective/realized spread measures win the majority of horseraces, while the Amihud [2002. Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets 5, 31-56] measure does well measuring price impact.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 92 (2009)
Issue (Month): 2 (May)
Pages: 153-181

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Handle: RePEc:eee:jfinec:v:92:y:2009:i:2:p:153-181

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Liquidity Transaction costs Effective spread Price impact Asset pricing;

References

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