Illiquidity and Stock Returns

A quarterly time series of the aggregate commission rate of NYSE trading for the period 1980-2003 is developed. The aggregate commission rate is of significant size, captures trading cost, and reflects market illiquidity. Consistent with financial theory, I find a positive relation between market returns and the aggregate commission rate. The impact of the aggregate commission rate on market returns survives a number of robustness checks and is significant after controlling for interest-rate factors, trading volume, and the variability of trading volume. Overall, the findings suggest that market-wide liquidity is a state variable important for asset pricing.


Issue Date:
2010-04
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/143268
Published in:
Review of Applied Economics, Volume 06, Number 1-2
Page range:
41-59
Total Pages:
19
JEL Codes:
G12
Series Statement:
Vol.6
No.1-2




 Record created 2017-04-01, last modified 2017-08-26

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