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Theory-based illiquidity and asset pricing

Version 2 2024-06-04, 11:05
Version 1 2017-06-28, 16:18
journal contribution
posted on 2024-06-04, 11:05 authored by Tarun ChordiaTarun Chordia, SW Huh, A Subrahmanyam
Many proxies of illiquidity have been used in the literature that relates illiquidity to asset prices. These proxies have been motivated from an empirical standpoint. In this study, we approach liquidity estimation from a theoretical perspective. Our method explicitly recognizes the analytic dependence of illiquidity on more primitive drivers such as trading activity and information asymmetry. More specifically, we estimate illiquidity using structural formulae in line with Kyle's (1985) lambda for a comprehensive sample of stocks. The empirical results provide evidence that theory-based estimates of illiquidity are priced in the cross-section of expected stock returns, even after accounting for risk factors, firm characteristics known to influence returns, and other illiquidity proxies prevalent in the literature.

History

Journal

Review of Financial Studies

Volume

22

Pagination

3629-3668

Location

United Kingdom

ISSN

0893-9454

eISSN

1465-7368

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2009 The Authors

Issue

9

Publisher

Oxford Academic

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