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Price Impact or Trading Volume: Why Is the Amihud (2002) Measure Priced?

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  • Xiaoxia Lou
  • Tao Shu

Abstract

The return premium associated with the Amihud (2002) measure is generally considered a liquidity premium that compensates for price impact. We find that the pricing of the Amihud measure is not attributable to the construction of the return-to-volume ratio intended to capture price impact, but is driven by the trading volume component. Additionally, the high-frequency price impact and spread benchmarks are priced only in January and do not explain the pricing of the trading volume component of the Amihud measure. Additional analyses suggest that the volume effect on stock return is likely caused by mispricing, not by compensation for illiquidity. Received September 20, 2014; editorial decision April 16, 2017 by Editor Andrew Karolyi.

Suggested Citation

  • Xiaoxia Lou & Tao Shu, 2017. "Price Impact or Trading Volume: Why Is the Amihud (2002) Measure Priced?," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4481-4520.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:12:p:4481-4520.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx072
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