The effects of non-trading on the illiquidity ratio

Patricia L. Chelley-steeley, Neophytos Lambertides, James M. Steeley

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)
310 Downloads (Pure)

Abstract

Using a simulation analysis we show that non-trading can cause an overstatement of the observed illiquidity ratio. Our paper shows how this overstatement can be eliminated with a very simple adjustment to the Amihud illiquidity ratio. We find that the adjustment improves the relationship between the illiquidity ratio and measures of illiquidity calculated from transaction data. Asset pricing tests show that without the adjustment, illiquidity premia estimates can be understated by more than 17% for NYSE securities and by more than 24% for NASDAQ securities.
Original languageEnglish
Pages (from-to)204-228
Number of pages24
JournalJournal of Empirical Finance
Volume34
Early online date8 Jul 2015
DOIs
Publication statusPublished - Dec 2015

Keywords

  • Illiquidity ratio
  • Non-trading
  • Asset pricing

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