LIQUIDITY AS PRICE EFFECT ON TIME TO SALE
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This paper proposes a new empirical measure of liquidity, termed “liquidity delta.” An asset is considered liquid if it can be traded quickly, in large quantities at low cost with little impact on market price. Trade-off between asking price and sale intensity, is one of the most common characteristics of assets. The new measure, liquidity delta, empirically captures this trade-off. We estimate liquidity delta for sixty major stocks listed on the Korea Stock Exchange. We demonstrate that liquidity delta is a useful measure of liquidity, with liquidity level and its variability showing negative and positive relation, respectively, with the asset's rate of return. The negative relationship shows premium for lack of liquidity whereas the positive one shows premium for liquidity risk.
Abstract
This paper proposes a new empirical measure of liquidity, termed “liquidity delta.” An asset is considered liquid if it can be traded quickly, in large quantities at low cost with little impact on market price. Trade-off between asking price and sale intensity, is one of the most common characteristics of assets. The new measure, liquidity delta, empirically captures this trade-off. We estimate liquidity delta for sixty major stocks listed on the Korea Stock Exchange. We demonstrate that liquidity delta is a useful measure of liquidity, with liquidity level and its variability showing negative and positive relation, respectively, with the asset's rate of return. The negative relationship shows premium for lack of liquidity whereas the positive one shows premium for liquidity risk.
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