The effects of non-trading on the illiquidity ratio

Patricia L. Chelley-Steeley; Neophytos Lambertides; James M. Steeley

doi:10.1016/j.jempfin.2015.05.004

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 journal › Article › peer-review

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 language	English
Pages (from-to)	204-228
Number of pages	25
Journal	Journal of Empirical Finance
Volume	34
Early online date	8 Jul 2015
DOIs	https://doi.org/10.1016/j.jempfin.2015.05.004
Publication status	Published - 2015

Bibliographical note

Keywords

asset pricing
illiquidity ratio
non-trading

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10.1016/j.jempfin.2015.05.004

Effects of non-trading on the illiquidity ratio
© 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Accepted author manuscript, 2 MBLicence: CC BY-NC-ND 3.0

Cite this

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title = "The effects of non-trading on the illiquidity ratio",

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.",

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AU - Lambertides, Neophytos

AU - Steeley, James M.

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AB - 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.

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JO - Journal of Empirical Finance

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ER -

The effects of non-trading on the illiquidity ratio

Abstract

Bibliographical note

Keywords

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