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Illiquidity and Stock Returns II: Cross-section and Time-series Effects
[A simple estimation of bid-ask spreads from daily close, high and low prices]

Author

Listed:
  • Yakov Amihud
  • Joonki Noh
  • Andrew Karolyi

Abstract

Lou and Shu decompose Amihud’s illiquidity measure (ILLIQ) proposing that its component, the average of inverse dollar trading volume (IDVOL), is sufficient to explain the pricing of illiquidity. Their decomposition misses a component of ILLIQ that is related to illiquidity. We find that this component affects stock returns significantly, both in the cross-section and in time-series. We show that the ILLIQ premium is significantly positive after controlling for mispricing, sentiment, and seasonality. In addition, the aggregate market ILLIQ outperforms market IDVOL in estimating the effect of market illiquidity shocks on realized stock returns.

Suggested Citation

  • Yakov Amihud & Joonki Noh & Andrew Karolyi, 2021. "Illiquidity and Stock Returns II: Cross-section and Time-series Effects [A simple estimation of bid-ask spreads from daily close, high and low prices]," The Review of Financial Studies, Society for Financial Studies, vol. 34(4), pages 2101-2123.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:4:p:2101-2123.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa080
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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