Do Measures of Liquidity Measure Liquidity?*
Ruslan Y. GoyenkoMcGill UniversityCraig W. HoldenIndiana UniversityCharles A. Trzcinka**Indiana University January 25, 2008
Liquidity plays an increasingly important role in empirical asset pricing, market efficiency, andcorporate finance. Identifying high quality proxies for liquidity based on daily data only (notintraday data) would permit liquidity to be studied over relatively long timeframes and acrossmany countries. We introduce new liquidity measures. We run horseraces of both monthly andannual liquidity measures. We compare to effective spread, realized spread, and price impactbased on both TAQ and Rule 605 data, including the decimals era. We identify the best proxiesin each case and find that the new liquidity measures win the majority of horseraces.
C15, G12, G20.
Liquidity, transaction costs, effective spread, price impact, asset pricing.
* We thank Utpal Bhattacharya, Andrew Ellul, Joel Hasbrouck, Christian Lundblad, DariusMiller, Xiaoyun Yu, and seminar participants at Indiana University and the Frontiers of FinanceConference in Bonaire, The Netherland Antilles. We also thank Charles Jones for making Dowspreads available. We are solely responsible for any errors. This paper was previously circulatedas “Horseraces of Monthly and Annual Liquidity Measures.”** Corresponding author: Charles A. Trzcinka, Kelley School of Business, Indiana University,1309 E. Tenth St., Bloomington, IN 47405-1701. Tel.: +1-812-855-9908; fax: +1-812-855-5875: email address: ctrzcink@ indiana.edu.