The effects of non-trading on the illiquidity ratio

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

*Corresponding author for this work

Research output: Contribution to journalArticle

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 pages25
JournalJournal of Empirical Finance
Volume34
Early online date8 Jul 2015
DOIs
Publication statusPublished - 2015

Bibliographical note

© 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

  • asset pricing
  • illiquidity ratio
  • non-trading

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    Chelley-Steeley, P. L., Lambertides, N., & Steeley, J. M. (2015). The effects of non-trading on the illiquidity ratio. Journal of Empirical Finance, 34, 204-228. https://doi.org/10.1016/j.jempfin.2015.05.004