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Liquidity premium and the Corwin-Schultz bid-ask spread estimate

Author

Listed:
  • Xindong Zhang
  • Junxian Yang
  • Huimin Su
  • Shun Zhang

Abstract

Purpose - – The purpose of this paper is to explore the price implication of a newly developed estimator of the bid-ask spread by Corwin and Schultz (2012). The paper focusses on whether the new measure as a liquidity proxy commands a significant premium. The research helps the understanding on the validity of the Corwin-Schultz estimate as a liquidity measure. Design/methodology/approach - – The authors carry out their examination based on the portfolio approach, cross-sectional regressions, and time-series regressions. For comparison, the authors also adopt other three liquidity proxies and mainly rely on the Fama-French three-factor model as the benchmark. The sample includes NYSE/AMEX/ARCA/NASDAQ ordinary common stocks over 1926-2010. Findings - – The paper finds that Corwin-Schultz spread lacks significant power to predict returns either in the pre- or post-1963 period. In contrast, other liquidity measures such as the price impact of Amihud (2002), trading discontinuity of Liu (2006), and turnover show stronger return predictability than the Corwin-Schultz spread estimate. Research limitations/implications - – The evidence indicates the limited ability of the Corwin-Schultz spread estimate to describe liquidity. Practical implications - – The comparison of the Corwin-Schultz spread with other liquidity measures helps practitioners and academic researchers to identify the appropriate proxy. Originality/value - – This paper, for the first time, provides a thorough assessment of the Corwin-Schultz spread estimate as a liquidity proxy, which distinguish from Corwin and Schultz (2012) who focus on whether their spread estimate measures transaction costs. Our study not only helps practitioners and academic researchers to select an adequate liquidity measure and an asset pricing model to use, but it also sheds light on the current debate about whether transaction costs have the first order importance in asset pricing.

Suggested Citation

  • Xindong Zhang & Junxian Yang & Huimin Su & Shun Zhang, 2014. "Liquidity premium and the Corwin-Schultz bid-ask spread estimate," China Finance Review International, Emerald Group Publishing Limited, vol. 4(2), pages 168-186, May.
    • Handle: RePEc:eme:cfripp:v:4:y:2014:i:2:p:168-186
    DOI: 10.1108/CFRI-09-2013-0121
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    Citations

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    Cited by:

    1. Ripamonti, Alexandre, 2016. "Corwin-Schultz bid-ask spread estimator in the Brazilian stock market," MPRA Paper 79459, University Library of Munich, Germany.
    2. Alexandre Ripamonti, 2019. "Capital Structure Adjustments and Asymmetric Information," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(12), pages 1-1, December.
    3. Ripamonti, Alexandre, 2020. "Financial institutions, asymmetric information and capital structure adjustments," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 75-83.
    4. Ripamonti, Alexandre & Silva, Diego & Moreira Neto, Eurico, 2018. "Asset Pricing and Asymmetric Information," MPRA Paper 87403, University Library of Munich, Germany.
    5. Ripamonti, Alexandre, 2019. "Capital Structure Adjustments and Asymmetric Information," MPRA Paper 96936, University Library of Munich, Germany.

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