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The effects of non-trading on the illiquidity ratio

The effects of non-trading on the illiquidity ratio Thumbnail


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.

Acceptance Date May 22, 2015
Publication Date Dec 1, 2015
Publicly Available Date Mar 28, 2024
Journal Journal of Empirical Finance
Print ISSN 0927-5398
Publisher Elsevier
Pages 204 -228
DOI https://doi.org/10.1016/j.jempfin.2015.05.004
Keywords Illiquidity Ratio, Non-Trading, Risk Premia
Publisher URL http://dx.doi.org/10.1016/j.jempfin.2015.05.004

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