International Review of Financial Analysis 19 (2010) 181–192

Contents lists available at ScienceDirect

International Review of Financial Analysis

New evidence on the relation between stock liquidity and measures of

trading activity
Daniel Chai a, Robert Faff b,⁎, Philip Gharghori a
a
Department of Accounting and Finance, Monash University, Clayton, Victoria 3800, Australia
b
UQ Business School, University of Queensland, St Lucia, Queensland, 4072, Australia

a r t i c l e i n f o a b s t r a c t

Article history: The goal of this paper is to examine two empirical issues regarding stock liquidity: (1) to what degree are
Received 19 February 2009 different liquidity proxies correlated? and (2) how are different liquidity proxies related to stocks' trading
Received in revised form 10 February 2010 characteristics? Answers to these questions will help us better understand whether there are common
Accepted 28 February 2010
sources of liquidity. This has considerable implications for studying stock liquidity, since selecting an
Available online 11 March 2010
appropriate proxy for liquidity is an important issue in empirical research design. Using data from the
JEL classification:
Australian equity market, our results confirm prior research that stocks' trading characteristics are important
G10 determinants of liquidity. Though the relationships are generally consistent with expectations, some proxies
do react differently to certain trading characteristics. This finding is consistent with the contention that
Keywords: liquidity is a multifaceted concept and each alternative proxy may only capture a certain aspect of liquidity.
Stock liquidity © 2010 Elsevier Inc. All rights reserved.
Trading characteristics
Australian evidence

1. Introduction Australian trading mechanism is different from that of the US market

Liquidity has long been an important issue for securities traded in
financial markets. A certain level of liquidity is necessary for securities
to be traded in the quantities required in a timely fashion without any
price discount. What are the factors that influence stock liquidity?
Early studies such as Tinic (1972), Benson and Hagerman (1974),
Branch and Freed (1977) and Stoll (1978) investigate the influence of
both stock and market characteristics on bid–ask spreads, which is
often used as a proxy for the trading cost of immediate transactions
(Demsetz, 1968). Stock characteristics include stock price, trading
volume, number of trades and return volatility. Market characteristics
include market structure and competition. Stoll (2000) and Chordia,
Roll and Subrahmanyam (2000) extend the early studies by employ-
ing various alternative proxies for liquidity. Similar to the previous
studies, stocks' trading characteristics such as stock price, trading
volume and volatility are found to be important determinants of the
spread and other liquidity proxies.
As with most of the finance literature, the role of stocks' trading
characteristics on liquidity has been focused on quote-driven markets,
namely, the NYSE, AMEX and Nasdaq. The purpose of this paper is to
fill the gap in the literature with respect to order-driven systems by
examining the relationship between stock liquidity and stocks'
trading characteristics in the order-driven market of Australia. The
⁎ Corresponding author.
E-mail address: r.faff@business.uq.edu.au (R. Faff).
primarily because of the absence of market makers and the fact that
public limit orders provide liquidity to the market and establish the
bid and ask prices. This market characteristic provides a more
transparent trading environment to market participants, as they
have the ability to observe recent trades. In recent years, order-driven
and limited order book market structures have increased rapidly
because of improvements in information technology and financial
market deregulation. As noted in Brown and Zhang (1997), markets
that allow limit orders tend to have a lower execution-price risk and
have a higher level of liquidity. The Australian market provides us the
opportunity to examine the role of liquidity in financial markets
across different stock exchange mechanisms.
In this paper, we extend the literature by employing six different
liquidity proxies constructed from low-frequency data. The proxies are
proportional bid–ask spread, stock turnover, the illiquidity ratio from
Amihud (2002), the return reversal measure from Pastor and
Stambaugh (2003), the zero return measure (proportion of zero daily
returns) from Lesmond, Ogden and Trzcinka (1999), and turnover-
adjusted number of zero daily volumes from Liu (2006). These liquidity
proxies are widely used in asset pricing research and each of them
represents different liquidity dimensions and trading behaviour. By
examining the relationships between these liquidity proxies and stocks'
trading characteristics, the current research seeks to understand the
extent to which there are common determinants of stock liquidity.
Specifically, we ask how are these proxies related to each other and how
are they related to stocks' trading characteristics? A finding that they are
not related in the same way will support the view that liquidity is a

1057-5219/$ – see front matter © 2010 Elsevier Inc. All rights reserved.
doi:10.1016/j.irfa.2010.02.005
182 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192
complex multidimensional concept. The results also help us to
understand the trading aspects that a particular proxy is capturing.
The efforts are significant as liquidity plays an important role in asset
pricing, and the selection of liquidity proxies in a research design would
have considerable influence on empirical results. The aims of this paper
are in the spirit of Stoll (2000), who asserts that understanding the
source of liquidity is important for asset pricing research.
When using these liquidity proxies, we have to be aware of their
limitations. Liu (2006) notes that existing liquidity proxies have a
limited ability to capture liquidity risk and they might be poor measures,
even in the particular dimension they intend to capture. Moreover,
liquidity proxies constructed from high-frequency (microstructure)
data are more precise than those created from low-frequency data
(Hasbrouck, 2009). Recently, Goyenko, Holden and Trzcinka (2009)
demonstrate that liquidity proxies constructed from low-frequency
data are comparable to high-frequency measures. Their results give us
some confidence on the use of the liquidity proxies employed in the
current study.
The remainder of the paper is organised as follows. Section 2
presents the literature review and statement of hypotheses. We first
introduce the liquidity proxies, then the theoretical background of the
relationship between trading characteristics and liquidity. Section 3
discusses the methodology and data sources. Section 4 presents the
empirical results and Section 5 concludes.
2. Literature review and statement of hypotheses
2.1. Liquidity proxies
Kyle (1985, p.1316) points out that “market liquidity is a slippery
and elusive concept, in part because it encompasses a number of
transactional properties of markets. These include tightness, depth, and
resiliency.” Tightness refers to the cost of transactions, such as the bid–
ask spread. Depth represents the ability of the market to absorb a large
quantity of trade without having a large impact on price. Resiliency is
defined as the speed with which the prices bounce back to equilibrium
following a large trade. Black (1971) earlier suggested another
dimension of liquidity, immediacy, which represents the speed with
which buy or sell orders can be executed. Liquidity proxies used in the
literature can therefore be classified into these four categories. While
these dimensions are to some degree overlapping, there is no single
liquidity proxy that fully captures all dimensions. This paper employs six
widely used liquidity proxies that are computed on a monthly basis
using both daily and monthly price information. The proxies are stock
turnover, the illiquidity ratio, the return reversal measure, proportional
spread, the zero return measure and turnover-adjusted number of zero
daily volumes. Each is discussed in turn below.
2.1.1. Stock turnover
Stock turnover is the ratio of the number of shares traded to the
number of shares outstanding:
turnoveri;t = VOLi;t = sharei;t ð1Þ
where VOLi,t is the total trading volume for stock i in month t and
sharei,t is the number of shares outstanding for stock i in month t.
Volume data for each stock is collected on a daily basis, while data on
the number of shares outstanding is collected on a monthly basis.1
1
Our method of calculating stock turnover over a month is similar to that used in
Chan and Faff (2003) and Datar et al. (1998). An alternative specification of Eq. (1) is
to use daily shares outstanding. However, these data are not readily available to us
over our sample period. We calculated an alternative measure of stock turnover by
averaging the current and prior month's shares outstanding to assess the robustness of
our results. These unreported findings, which are available on request from the
authors, demonstrate that our inferences are robust to this alternative measure.
The reciprocal of turnover is often used to represent the average
holding period of securities (e.g. see Atkins and Dyl, 1997). The
smaller the turnover rate, the longer the average holding period.
According to the clientele effect of Amihud and Mendelson (1986),
assets with higher spreads have relatively longer expected holding
periods. Thus, turnover should be negatively related to spread and
should be positively related to liquidity. Datar et al. (1998) show that
stock returns are strongly negatively related to the turnover ratio. In
contrast, Lee and Swaminathan (2000) question the use of turnover as
a liquidity proxy. They find some evidence that turnover is not highly
correlated with firm size or the relative bid–ask spread. Further, they
show that turnover is related to stocks' past performance — stocks
that are perceived to or have growth potential (growth stocks) have a
higher turnover rate than stocks that are relatively undervalued
(value stocks). However, Chan and Faff (2003) find evidence against
the value/growth argument. They find a strong negative relationship
between turnover and stock returns from 1990 to 1999 in the
Australian market. The significant relationship remains even after
controlling for size, book-to-market, beta and momentum.
2.1.2. Illiquidity ratio
The illiquidity ratio, proposed by Amihud (2002), is defined as the
daily absolute return of a stock divided by its trading volume on
that day. The monthly illiquidity ratio is obtained from the following
equation:
D
1 i;t
Illiquidi;t = ∑ jr j = vi;d;t ð2Þ
Di;t d = 1 i;d;t
where ri,d,t is the absolute return for stock i on day d in month t, and vi,d,t
is the trading volume in millions of dollars for stock i on day d in month t
and D is the number of daily observations for stock i in month t.
The illiquidity ratio captures the price movement associated with
trading volume or the price impact of the order flow. Stocks are
regarded as illiquid (liquid) if small (large) trades cause high (small)
price movement. The illiquidity ratio follows Kyle's (1985) concept of
liquidity, which examines the relationship between price movement
and net order flow and is commonly known as price impact or Kyle's λ.
Amihud (2002) demonstrates that the illiquidity ratio is positively
related to stock returns in the cross-section. The illiquidity ratio
overcomes the shortcoming of stock turnover in that it incorporates
price movement.2 Hasbrouck (2009) compares various price impact
measures constructed from daily and microstructure data. He finds
that the Amihud illiquidity ratio is most strongly correlated with
microstructure-based price impact measures. Goyenko et al. (2009)
also find that the Amihud measure does a good job in capturing price
impact.
Similar to other liquidity measures, the illiquidity ratio also has some
limitations. As Grossman and Miller (1988) point out, the illiquidity
ratio is usually obtained based on averaged price changes and averaged
trading volume from the past. Therefore, it cannot answer the question
of how the stock price is influenced by the sudden arrival of a large trade.
Further, it cannot distinguish whether the price fluctuations are due to
the lack of liquidity or the arrival of new information. A stock might
experience large price fluctuations not because it is illiquid but because
new information arrives frequently. To make the liquidity proxies
consistent, we flip the sign of the illiquidity ratio so that it is a measure of
liquidity.
2
Assume that stock A and stock B have the same turnover ratio over the same
period, but stock A has a price movement of 3% and stock B has a price movement of
6%. According to the turnover ratio, both stocks have the same level of liquidity.
However, in reality stock A may be more liquid than stock B since for stock A, the same
level of trading volume induces lower price movement.
 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192
2.1.3. Return reversal measure
The return reversal measure, developed by Pastor and Stambaugh
(2003), captures the price changes associated with order flow.
Following Pastor and Stambaugh (2003), the monthly return reversal
measure for security i is obtained by running the following OLS
regression:
e e
ri;t + 1 = γ0 + γ1 ri;t + λ½signðri;t Þ × voli;t  + εi;t ð3Þ
where rei,t+ 1 is the excess return with respect to the value-weighted
market index return for firm i on day t + 1, ri,t is the return for firm i on
day t, sign(rei,t) is the sign of the excess return with respect to the
value-weighted market index return for firm i on day t, and voli,t is the
trading volume in millions of dollars for firm i on day t. The coefficient
λ measures the expected return reversal for a given trading volume.
The return reversal measure is in line with the concept of the price
impact (resiliency) dimension of liquidity. The basic idea in this model
is that an asset is considered liquid if it is able to absorb large amounts
of trading quickly without a big change in its price. In a quote-driven
environment, the return reversal is a form of compensation to market
makers for bearing higher risk when facing selling (buying) pressures
from liquidity or non-informational trades. Thus, lambda in Eq. (3)
should be negative and larger in absolute value when liquidity is low.
However, the absence of dealers on the Australian Securities Exchange
(ASX) suggests that the return reversal effect may be less relevant,
when compared to markets such as NYSE.
When using the return reversal measure, we have to be cautious
about the role that volume can play in current and lagged returns.
Llorente, Michaely, Saar, and Wang (2002) show that stocks accompa-
nied with a high degree of information-motivated trades produce more
volume-related return continuations. This return continuation would
weaken the volume-related return reversal. Recently, Goyenko et al.
(2009) find that the return reversal measure has a low correlation with
microstructure-based price impact measures and sometimes has the
wrong sign. It is important to note that Pastor and Stambaugh (2003) do
not apply the lambda directly for individual stocks, but use a portfolio
approach instead. Moreover, they employ data filtering rules that are
likely to reduce the occurrence of extreme values for their measure.
Pastor and Stambaugh (2003) exclude stocks with less than 15 days of
return observations in a given month. This criterion could exclude quite
a few small firms in the Australian market. Therefore, we set a weaker
rule that firms only need to have at least 10 return observations in a
given month.3
2.1.4. Proportional spread
The proportional bid–ask spread for stock i in month t is given by:
D emerging markets. They also find evidence that this measure
1 i;t A B A B
pspreadi;t = ∑ ðp −pi;d;t Þ = ð0:5pi;d;t + 0:5pi;d;t Þ ð4Þ
Di;t d = 1 i;d;t
where pAi,t (pBi,t) is the daily closing ask (bid) prices for stock i on day d
in month t and D is the number of daily observations for stock i in
month t.
The proportional spread is a widely used measure of asset liquidity
in the literature. Early research focuses on quoted bid–ask spread
(difference between the ask price and the bid price), which is a direct
measure of transaction costs. Microstructure theory decomposes the
spread into two components. The first component allows market
makers to generate revenue from order flow to cover inventory costs
and order processing fees. The second is an adverse selection
component, which arises because market makers are facing investors
3
This filtering rule does not affect our results. The results are robust when either 5
or 15 return observations are the minimums imposed for inclusion. This will be
discussed further in Section 3.
183
who are better informed than they are. However, bid–ask spreads are
not special to quote-driven markets. Glosten (1994) shows that bid–
ask spreads are positively associated with adverse selection costs in an
order-driven trading environment, suggesting that the bid–ask spread
represents the cost of supplying immediacy. This finding is supported
by Handa, Schwartz and Tiwari (1998) who claim that the bid–ask
spread is a natural property of an order-driven market because
market participants are willing to pay for price certainty.
Despite being a widely used liquidity proxy, the bid–ask spread
has certain shortcomings. As noted in Grossman and Miller (1988),
buying and selling do not appear simultaneously but are randomly
separated in time. The transaction price may occur outside or within
the bid and ask prices. This is because when buying securities, limit
order customers may be willing to pay more than the bid price to
minimise the price risk associated with waiting. Therefore, the spread
cannot serve as a reliable measure of the trading cost. Brennan and
Subrahmanyam (1996) also argue that the bid–ask spread is a noisy
measure for the same reason. Further, large price stocks normally
have wider spreads, but this does not really mean that they are
illiquid. The proportional spread overcomes the problem that quoted
spread is an increasing function of stock price. For consistency, we flip
the sign of the proportional spread to make it a liquidity measure.
2.1.5. Zero return measure
The proportion of zero daily returns observed over the relevant
month is calculated as:
zeroi;t = zeroreturni;t = tradingdayi;t ð5Þ
where zeroreturni,t is the number of zero daily return days for stock i in
month t, and tradingdayi,t is the number of trading days for stock i in
month t.
Lesmond et al. (1999) argue that zero returns occur when the
transaction cost threshold is not exceeded for marginal traders who
may be informed or uninformed. For informed traders, they are likely
to reduce their desired trades or choose not to trade when
information is not sufficient to compensate the cost of transacting.
Therefore, there will be no price movement from the previous day. For
liquidity traders, they will generally choose not to trade if liquidity is
low and the transaction costs are high. As a result, price will also
remain unchanged. Lesmond et al. (1999) show that the zero return
measure is negatively related with firm size and is positively related
with spread measures, which is consistent with the transaction cost
effect on stock returns. Bekaert, Harvey and Lundblad (2007) find that
the zero return measure is to some degree correlated with other
liquidity measures such as stock turnover and bid–ask spreads across
significantly predicts future returns in emerging equity markets.
The zero return measure is readily obtainable since it only requires
daily stock price information. However, there are some limitations
with the zero return measure. As noted in Bekaert et al. (2007), daily
zero returns may occur because of a lack of information flow. Smaller
stocks may automatically show a higher level of non-trading
compared to larger stocks. Further, the zero return measure ignores
price fluctuation within a day, and therefore, it cannot truly represent
the trading behaviour of stocks. To convert the measure into a
liquidity proxy, it is modified as 1 − zeroi,t.
2.1.6. Turnover-adjusted number of zero daily volumes
Liu (2006) proposes a new liquidity measure that aims to capture
multiple dimensions of liquidity and places a particular focus on
trading speed. The liquidity measure is defined as:


1 = ðturnoveri;t Þ 21
LMi;t = NoZVi;t + × ð6Þ
Deflator NoTDt
184 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192
where NoZVi,t is the number of zero daily trading volumes for stock i in
month t; turnoveri,t is the stock turnover rate for stock i in month t
obtained from Eq. (1); NoTDt is the total number of trading days in the
market in month t; and the deflator4 is set to 480,000 as suggested in
Liu (2006). Volume data for each stock are collected on a daily basis.
NoZV serves as an indicator of liquidity — the lower the number of
zero daily trading volumes, the more frequent the trade and, thus, the
more liquid the stock. It reflects the continuity of trading and potential
delay in executing a trade (Liu, 2006). To some extent, the turnover
component captures the notion of how much quantity has been
traded. It acts as a tiebreaker when two stocks have the same number
of zero daily trading volumes. Therefore, stocks that LM classifies as
most liquid are those that are traded frequently and have large
turnover over the relevant month. Multiplication by the factor 21/
NoTD standardizes the number of trading days in a month to 21 and
therefore, makes LM comparable over time.
In sum, LM uses the number of zero daily trading volumes to
identify the liquidity of stocks, and then it relies on turnover to
distinguish between stocks that have the same level of liquidity as
classified by the number of zero daily volumes. The role of NoZV is also
similar to the number of zero daily returns in Lesmond et al. (1999).
Therefore, LM also reflects the trading cost dimension of liquidity. The
turnover component in LM overcomes the potential size effect in the
number of zero daily trading volumes. However, it has a short-
coming similar to the turnover measure — it does not consider stock
price movement. For consistency, we flip the sign of LM so that it is a
measure of liquidity.
2.1.7. Summary of liquidity proxies
In sum, each of the six liquidity proxies captures a different dimension
of liquidity. Proportional spread and the zero return measure can be
categorised as measures of tightness since both proxies reflect trading
costs. The illiquidity ratio represents the price movement associated with
trading volume and therefore, it is related to depth/price impact. The
return reversal measure captures resiliency. Finally, stock turnover and
the turnover-adjusted number of zero daily volumes represent immedi-
acy because both proxies reflect trading speed and trading frequency.
There is no consensus on which is the superior liquidity proxy. It is
also important to note that while they are all plausible liquidity proxies,
each of them captures a particular element of liquidity and trading
behaviour. For example, Stoll (2000) points out that spreads capture real
friction and price impact measures represent informational friction.
Further, since our liquidity proxies are obtained from low-frequency
data instead of intraday data, they are likely to contain some noise.
Nevertheless, as the liquidity proxies that we employ address the four
separate dimensions of liquidity, they can help us to understand the role
that liquidity plays in financial markets.
In the subsequent analysis, we refer to stock turnover as
TURNOVER; the Amihud (2002) illiquid ratio as AMIHUD, the return
reversal measure as PS; proportional bid–ask spread as PBA; the zero
measure as ZERO; and the turnover-adjusted number of zero daily
volumes proposed by Liu (2006) as LM.
2.2. Determinants of liquidity
In this section, we briefly review the literature to provide a context
for the current study. Stock liquidity can be measured by the trading
cost for an immediate transaction. Traders need a price concession
when buying the asset immediately and they can then sell the asset
4
The reciprocal of turnover produces a wide range of numbers that can be very
large or very small, depending on the magnitude of the monthly turnover rate. The
deflator is used to ensure that 0 b [(1/xmonthturnover)/deflator] b 1, so stocks that have
the same number of zero daily volumes (NoZV) can be further differentiated.
according to some optimal policy. Demsetz (1968) shows that the
difference between the bid and ask price (bid–ask spread) can
represent the trading cost for such transactions. Under this view, the
spread serves as a (inverse) proxy for stock liquidity. If the spread is
important, it is essential to understand the sources of the spread. After
Demsetz (1968), studies such as Tinic (1972), Benson and Hagerman
(1974), Branch and Freed (1977), Stoll (1978) and Stoll and Whaley
(1983) examine variables that could influence the spread. The
variables can be divided into three categories: (1) variables that
have an effect on the cost of positioning for an individual security (i.e.
trading characteristics), (2) variables associated with the structure of
the institutions that provide liquidity (e.g. capitalisation of the
portfolio and securities included in the portfolio), and (3) variables
that have an influence on the profit margin of the specialists (e.g.
market structure and competition). The empirical results show that
variables related to stocks' trading characteristics are most influential.
Recent studies such as Chordia, Roll and Subrahmanyam (2000) and
Stoll (2000) extend early studies by employing different alternative
liquidity proxies. Using a cross-sectional regression approach, Chordia
et al. (2000) find that variables such as stock price, volatility and trading
volume are related to the quoted spread, the proportional spread,
quoted depth, the effective spread and the proportional effective spread.
Except stock price, the influence of volume and volatility are consistent
through different liquidity proxies.
Stoll (2000) uses ten different liquidity proxies constructed from
microstructure data to examine whether they are related in the same
way to stocks' trading characteristics. The purpose of his investigation
is to understand the common sources of different liquidity measures.
His sample includes stocks from both the NYSE/AMEX and Nasdaq
over a three-month period from December 1997 to February 1998.
The liquidity proxies include various spread measures, covariance of
price changes, price impact measures, and the volatility at the opening
of the market. He first demonstrates that liquidity measures that
capture different dimensions of liquidity are not strongly correlated.
He then performs cross-sectional regressions having different
liquidity proxies regressed on stock price, return variance, trading
volume and number of trades. These trading characteristics are
found to be important determinants of liquidity. However, not every
liquidity proxy is related in the same way to the estimated charac-
teristics. The results imply that liquidity is a multifaceted concept.
Moreover, the influence of stock price on price impact measures is
different in the two markets. Stoll (2000) argues that this finding may
indicate that information is incorporated into stock prices differently
in the two markets.
The underlying principle on the relationship between liquidity and
stock characteristics is based on order execution and inventory
control (Stoll, 2000). Large trading volume reduces the risk of carrying
inventory for a period of time, which should increase stock liquidity.
Higher return volatility increases the risk of holding inventory, and it
should have a negative effect on stock liquidity. Stock price controls
the effects of price discreteness and can be used as a proxy for risk, as
low price stocks tend to be riskier. The transaction costs of small size
firms should also be higher than for large size firms (Stoll and Whaley,
1983). Based on this reasoning, our testable hypotheses are:
Hypothesis 1a. Price per share is expected to be positively related to
liquidity.
Hypothesis 1b. Trading volume is expected to be positively related to
liquidity.
Hypothesis 1c. Return volatility is expected to be negatively related
to liquidity.
We refer to price per share at the end of each month as PRICE;
return volatility of daily stock returns in each month as VARIANCE;
and trading volume (aggregated in each month) as VOLUME.
 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192
2.3. Other potential determinants
We incorporate two additional variables into our analysis —
absolute monthly stock return and the thin trading measure proposed
by Beedles, Dodd and Officer (1988).
Absolute monthly stock return (ABSR) can be treated as an
alternative measure of volatility and may be used as a measure of
information flow.5 The advantage of this measure is that it is simple to
calculate, particularly in comparison to conventional volatility mea-
sures. Similar to volatility, ABSR should have a negative influence on
liquidity. ABSR is measured as the absolute value of a stock's monthly
return.
Beedles et al. (1988) use the difference between the last price
date and last trading date in a month to create a crude proxy for
the proportion of missing daily returns. Specifically, the measure is
defined as:
BEEDLES = f100−½100 = ðn + 1Þg = 100 ð7Þ
where n is the difference in time (measured in days) between the last
price date and last trading date in each month from the Centre for
Research in Finance database (CRIF). For example, if a stock is traded on
the last trading day of the month, n = 0 and BEEDLES = 0 (0%) — that is,
it is assumed that the stock traded every day. As another example, if the
stock's last trade was on the second last trading day, n = 1 and
BEEDLES = 0.5 (50%) — that is, it is assumed that the stock traded every
second day.
Beedles et al. (1998) note that this measure is not an ideal proxy
for liquidity. It is possible that a stock has no difference between the
last price date and the last trading date in a month throughout its
trading history. Nevertheless, they find that small size portfolios have
a larger proportion of daily missing returns, indicating that small
stocks are less liquid. Their results show that liquidity is a partial
explanation for the size effect. Since the BEEDLES measure aims to
capture the thin trading aspect of stock illiquidity, it should be
negatively related with liquidity. Thus, out testable hypotheses for
these two variables are:
Hypothesis 1d. Absolute monthly return is expected to be negatively
related to liquidity.
Hypothesis 1e. Beedles' thin trading measure is expected to be
negatively related to liquidity.
3. Data and methodology
3.1. Data sources and sample coverage
The analysis in this paper is carried out at the monthly level from
January 1991 to September 2006. The data come from two main sources.
Daily stock information such as stock price, trading volume and the
value-weighted market index are obtained from the Securities Industry
Research Centre of Asia-Pacific (SIRCA). Month end bid and ask prices
are also obtained from SIRCA. Company information such as market
capitalisation, number of shares outstanding and monthly stock return
is obtained from the Centre for Research in Finance (CRIF) database.
In the calculation of the liquidity proxies, a daily observation is
excluded if the stock did not trade on the current or previous day.6
5
The idea is similar to using the absolute value of daily stock returns to proxy daily return
volatility (e.g. Duffee, 1995; Ding, Granger and Engle, 1993; Chordia, Shivakumar and
Subrahmanyam, 2004).
6
As an alternative way to deal with the non-trading issue, we assign a zero return to
the current trading day if the stock did not trade on the previous day. The results are
robust and are available upon request from the authors.
185
Finally, a stock must have at least 10 valid return observations in a
given month.7 Panel A of Table 1 shows market capitalisations and
coverage of our sample versus the population in the CRIF database.
From the table, on average, our sample covers more than 60% of total
stocks available from 1995 to 2005. The coverage is lower from 1991
to 1994 with less than 40% coverage in 1991 and 1992. As expected,
our data filtering rules have excluded quite a few small stocks.
Compared with the CRIF sample, our minimum market capitalisation
is higher and the median market capitalisation is more than double.
Nevertheless, our sample is representative of the Australian market
given that, on average, it comprises more than 80% of the market's
total capitalisation.
Month end bid and ask prices are not available for all stocks in our
sample. In order to calculate the spread, we revert to a subset of stocks
that have bid–ask prices. Panel B of Table 1 shows the availability of
the bid–ask spread data. Comparing the number of companies in
Panel A and Panel B, the sample coverage is about 10 percentage
points lower in the latter. In our empirical analysis, we use the sample
presented in Panel B of Table 1 only in spread related results.
3.2. Fama–MacBeth cross-sectional regressions
To examine whether trading characteristics are significant deter-
minants of liquidity, following Stoll (2000), we run cross-sectional
regressions using monthly data according to:
K
Liquidityjt = α0t + ∑ βkt TradingActivityjkt + εjt ð8Þ
k=1
where j = 1,2,…,N; t = 1,2,…,T; Liquidity is the liquidity proxy for
stock j in month t; TradingActivity represents each trading charac-
teristic variable such as stock price, volatility, and trading volume. The
research method involves three stages. In stage one, the dependent
variable (each liquidity proxy) and independent variables (trading
characteristics) required for the cross-sectional regression are con-
structed. We then estimate different versions of Eq. (8) each month
from January 1991 to September 2006 in stage two. Following Stoll
(2000) and Chordia et al. (2000), the regressions are estimated using
OLS. In stage three, we compute the average coefficient and variance
from the time series of the cross-sectional regression coefficients
generated in stage two.
We follow the Fama and MacBeth (1973) methodology and apply
equal weight to all slope coefficients in estimating the average
coefficient.8 Chordia et al. (2000) note that the coefficients from the
estimated regression are likely to be correlated across time if both
the dependent variable and independent variables are not returns.
7
We use this rule for three reasons. First, the return reversal measure requires at least four
return observations within a month. Second, we need about the same number of daily return
observations in order to calculate the standard deviation (volatility) of a stock's return. Third,
the liquidity proxies can be estimated with less noise when a certain number of observations
are required. However, as will be shown in Table 1, the filtering criteria skew our sample
towards larger firms. As a robustness check to ensure that our results are not influenced by
firm size, we impose a weaker restriction that stocks only need to have 5 valid return
observations in a month. This would allow us to include more small firms. As a further
robustness check, we look at results in a sub-period (e.g. after year 1995) where the data
coverage is higher. Similar results are obtained under different filtering rules. Other data
filtering criteria such as the impact of low price stocks or IPOs were also considered.
Specifically, the influence of trading characteristics remain similar if we exclude stocks with
price below 10 cents or if stocks were IPOs for the calendar year. The results are available from
the authors upon request.
8
We chose the Fama–MacBeth procedure over the pooled time-series cross-section
approach because the error terms in the pooled regression are likely to be cross-
sectionally correlated over time (Cochrane, 2001). The standard error will be biased
when errors are correlated. Petersen (2009) refers to this as a time effect and the
Fama–MacBeth procedure is designed to address this effect.
186 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192

Table 1
Comparison of market capitalisation and sample coverage. At the end of each year, we calculate summary statistics of stocks' market capitalisation in our sample and in the CRIF database.
Min, median and mean are in $millions. Max and total market capitalisation are in $billions. Panel A (B) presents the results for the sample without (with) bid–ask spread data.

Market capitalisation — sample Market capitalisation — all stocks (CRIF) Coverage percentage

Year Number of Min. Max. Median Mean Total Number of Min. Max. Median Mean Total Number of Market
firms ($M) ($B) ($M) ($M) ($B) firms ($M) ($B) ($M) ($M) ($B) firms cap.

Panel A: without bid–ask spread data

1991 302 1.36 21.51 72.55 618.43 186.77 926 0.05 21.55 8.98 267.10 247.34 32.61 75.51
1992 328 1.08 21.52 80.23 595.38 195.28 893 0.02 27.29 10.75 301.45 269.19 36.73 72.54
1993 565 1.45 29.12 50.92 532.76 301.01 1008 0.05 29.12 19.57 367.81 370.75 56.05 81.19
1994 446 2.12 33.60 94.62 594.16 265.00 1099 0.17 33.60 19.13 309.39 340.02 40.58 77.94
1995 580 1.69 37.03 58.46 563.76 326.98 1105 0.46 37.03 20.56 358.75 396.42 52.49 82.48
1996 750 0.72 35.60 49.24 552.19 414.14 1125 0.47 35.60 26.04 411.39 462.82 66.67 89.48
1997 621 1.63 30.26 73.42 734.38 456.05 1145 0.31 30.26 23.12 445.97 510.64 54.24 89.31
1998 626 0.65 35.62 83.76 898.36 562.37 1128 0.31 35.62 21.56 532.53 600.70 55.50 93.62
1999 841 1.59 53.17 54.47 764.07 642.58 1207 0.68 53.17 31.37 583.23 703.96 69.68 91.28
2000 862 1.15 43.70 42.02 764.40 658.91 1315 0.95 54.03 24.16 564.93 742.88 65.55 88.70
2001 772 0.92 49.74 56.35 922.05 711.82 1290 0.04 49.74 21.75 579.93 748.11 59.84 95.15
2002 726 0.89 48.18 62.08 916.78 665.58 1307 0.17 48.18 20.35 528.18 690.34 55.55 96.41
2003 965 1.45 45.76 57.36 803.16 775.05 1358 0.16 45.76 29.93 618.56 840.01 71.06 92.27
2004 1119 1.05 54.95 59.00 879.47 984.13 1488 0.58 54.95 33.88 701.55 1043.90 75.20 94.27
2005 1112 1.94 81.67 71.84 1038.59 1154.91 1614 0.65 81.67 34.95 763.19 1231.79 68.90 93.76

Panel B: with bid–ask spread data

1991 245 1.36 21.51 84.62 696.40 170.62 926 0.05 21.55 8.98 267.10 247.34 26.46 68.98
1992 268 1.08 21.52 91.28 654.79 175.48 893 0.02 27.29 10.75 301.45 269.19 30.01 65.19
1993 459 1.45 29.13 65.29 602.77 276.67 1008 0.05 29.12 19.57 367.81 370.75 45.54 74.62
1994 368 2.12 33.61 95.41 645.97 237.72 1099 0.17 33.60 19.13 309.39 340.02 33.48 69.91
1995 501 1.69 37.03 58.53 590.22 295.70 1105 0.46 37.03 20.56 358.75 396.42 45.34 74.59
1996 652 1.45 35.60 46.13 573.69 374.04 1125 0.47 35.60 26.04 411.39 462.82 57.96 80.82
1997 551 1.63 30.26 64.27 753.53 415.19 1145 0.31 30.26 23.12 445.97 510.64 48.12 81.31
1998 551 0.65 35.62 72.97 885.02 487.65 1128 0.31 35.62 21.56 532.53 600.70 48.85 81.18
1999 724 1.59 53.17 48.27 829.89 600.84 1207 0.68 53.17 31.37 583.23 703.96 59.98 85.35
2000 690 1.15 43.70 44.86 876.68 604.91 1315 0.95 54.03 24.16 564.93 742.88 52.47 81.43
2001 592 0.92 49.74 63.45 1047.32 620.01 1290 0.04 49.74 21.75 579.93 748.11 45.89 82.88
2002 544 0.89 48.18 67.86 1008.21 548.47 1307 0.17 48.18 20.35 528.18 690.34 41.62 79.45
2003 675 2.18 45.76 69.97 930.94 628.38 1358 0.16 45.76 29.93 618.56 840.01 49.71 74.81
2004 781 1.05 54.95 68.75 958.26 748.40 1488 0.58 54.95 33.88 701.55 1043.90 52.49 71.69
2005 774 2.53 81.67 79.24 1131.35 875.66 1614 0.65 81.67 34.95 763.19 1231.79 47.96 71.09

Cochrane (2001) also suggests that ignoring such correlation could have last price date and the last trading date. This difference is, however, zero
a large impact on the inferences made. Following Cochrane (2001), the for most of the stocks. Stocks are deemed to have serious non-
adjusted standard
pffiffiffiffiffiffiffiffiffiffiffiffiffi pffiffiffiffiffiffiffiffiffiffierror is obtained by multiplying the standard error synchronous trading problems if the difference is greater than zero. The
by 1 + p = 1−p, where p is the first-order auto-correlation of the summary statistics reflect the nature of the BEEDLES measure. Both
estimated coefficients across the sample period. liquidity proxies and trading characteristic variables display consider-
able positive skewness with the sample means exceeding the medians.
Therefore, in our empirical analysis we take the logarithmic transfor-
4. Empirical results mation of PRICE and VOLUME. VARIANCE, ABSR and BEEDLES are not
transformed because they may be zero for some stocks.
4.1. Descriptive statistics

4.1.1. Basic results 4.1.2. Size groups

Panel A of Table 2 reports the time-series average of the cross-
sectional statistics of the liquidity proxies and stocks' trading
characteristics. Recall that we flipped the sign of AMIHUD, LM and
PBA to make them liquidity measures. Therefore, a negative sign for
the statistics (except standard deviation) is expected for AMIHUD, LM
and PBA. Among the six liquidity proxies, AMIHUD exhibits the largest
standard deviation. PS has a wide range of values from positive to
negative. We expect the value of PS to be negative and larger in
absolute value when liquidity is low. This is due to the return reversal
effect — the greater the order flow the greater the change in the
subsequent expected return. TURNOVER, ZERO and PBA have a lower
variation compared to the other proxies.
The lowest priced stock in our sample is less than 10 cents, while the
highest is above 60 dollars. This suggests that our sample comprises
stocks across a wide range of the size spectrum. It is worth mentioning
that BEEDLES is zero in minimum, lower quartile, median and upper
quartile. Recall that BEEDLES is calculated as the difference between the
To understand the distributions of the liquidity proxies and trading
characteristics further, we separate the sample into size groups. In each
month, stocks are first sorted based on their current month's market
capitalisation and are then separated equally into three size groups.
Panels B, C and D of Table 2 report summary statistics for small,
medium and large size firms, respectively. In general, small firms have
the lowest average price and the highest return volatility. The mean
value of PBA, LM, AMIHUD and ZERO increases from the small firm to
the large firm sample, which indicates that small firms are less liquid
compared to medium-size and large firms. The mean value of PS does
not exhibit a strong pattern across size groups. The small size group
has the largest average TURNOVER and it decreases dramatically from
small to medium-size firms. The difference is smaller between
medium-size and large firms. This finding is in contrast to the results
on the other liquidity proxies and could be explained by the results
on VOLUME. On average, small and large firms have a higher mean,
lower quartile, median and upper quartile VOLUME than medium-
 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192 187

Table 2
Summary statistics. Mean, minimum, lower quartile, median, upper quartile, maximum and standard deviation are computed each month cross-sectionally and then averaged across
time from January 1991 to September 2006. AMIHUD is the liquidity ratio from Amihud (2002). PS is the return reversal measure from Pastor and Stambaugh (2003). TURNOVER is
the stock turnover rate. ZERO is the zero return measure from Lesmond et al. (1999), but is modified as (1 — the proportion of zero daily returns). LM is the turnover-adjusted zero
daily volumes from Liu (2006). PBA is the proportional bid–ask spread. PRICE is stock price at the end of each month. VARIANCE is the variance of stock returns. VOLUME is the
aggregate trading volume. BEEDLES is the thin trading measure proposed by Beedles et al. (1988). ABSR is the absolute stock monthly return. All the variables are computed monthly.
VOLUME is measured in $millions. VARIANCE is multiplied by 100. Stocks are sorted based on their current month's market capitalisation in each month and then allocated into three
equal groups: small, medium and large. Panel A presents the results for the entire sample whereas Panels B, C and D present the results for the small firm, medium firm and large firm
sample, respectively. The F-tests (Kruskal–Wallis (KW) tests) are based on the null hypothesis that the mean (median) values of indicated variables are equal across the three size
groups. P-values are reported for both the F and KW tests in Panel E.

Mean Min Lower quartile Median quartile Upper quartile Max Standard deviation

Panel A: all firms sample

(a) Liquidity proxies
AMIHUD − 1.7954 − 101.5758 − 1.5021 − 0.5063 − 0.1393 − 0.0013 5.7740
PS 0.0017 − 6.1719 − 0.0341 0.0001 0.0349 7.1513 0.5337
TURNOVER 0.0453 0.0001 0.0127 0.0253 0.0496 1.1577 0.0771
ZERO 0.6953 0.0672 0.5782 0.7148 0.8339 0.9997 0.1825
LM − 1.6424 − 9.5488 − 2.8411 − 0.4471 − 0.0367 − 0.0366 2.1404
PBA − 0.0380 − 0.3280 − 0.0518 − 0.0273 − 0.0139 − 0.0010 0.0364
(b) Trading characteristics
PRICE 2.0738 0.0083 0.2160 0.7511 2.1586 65.9903 4.4142
VARIANCE 0.3271 0.0006 0.0288 0.0889 0.2653 30.8573 1.6245
VOLUME 9.2401 0.0215 0.9462 2.5707 7.6052 360.9786 23.471
BEEDLES 0.0360 0.0000 0.0000 0.0000 0.0000 0.8961 0.1397
ABSR 0.1207 0.0000 0.0308 0.0730 0.1510 2.1485 0.1689

Panel B: small firms sub-sample

(a) Liquidity proxies
AMIHUD − 2.3620 − 80.4151 − 2.0294 − 0.8491 − 0.3511 − 0.0142 6.7288
PS 0.0017 − 3.4636 − 0.0695 0.0005 0.0712 3.4516 0.4938
TURNOVER 0.0665 0.0031 0.0208 0.0388 0.0753 1.0462 0.1013
ZERO 0.6049 0.0967 0.4911 0.6175 0.7324 0.9775 0.1737
LM − 2.8784 − 9.2273 − 4.5741 − 2.5626 − 0.8673 − 0.0366 2.2809
PBA − 0.0702 − 0.3245 − 0.0843 − 0.0610 − 0.0442 − 0.0149 0.0417
(b) Trading characteristics
PRICE 0.2490 0.0085 0.0736 0.1506 0.2922 4.0553 0.3761
VARIANCE 0.6749 0.0067 0.1614 0.3148 0.6137 22.1583 1.9321
VOLUME 6.9347 0.0830 1.0396 2.3370 5.6645 208.5090 18.1314
BEEDLES 0.0702 0.0000 0.0000 0.0000 0.0106 0.8347 0.1863
ABSR 0.1785 0.0000 0.0578 0.1250 0.2309 1.6503 0.2031

Panel C: medium-size firms sub-sample

(a) Liquidity proxies
AMIHUD − 1.9128 − 48.8644 − 1.8415 − 0.7317 − 0.2793 − 0.0147 4.4204
PS 0.0014 − 2.7278 − 0.0501 0.0000 0.0493 3.1471 0.4091
TURNOVER 0.0393 0.0013 0.0105 0.0209 0.0427 0.6605 0.0647
ZERO 0.6735 0.1420 0.5767 0.6909 0.7908 0.9823 0.1606
LM − 1.5560 − 8.4810 − 2.4928 − 0.6508 − 0.0367 − 0.0366 1.9767
PBA − 0.0311 − 0.1359 − 0.0379 − 0.0267 − 0.0192 − 0.0073 0.0180
(b) Trading characteristics
PRICE 1.1602 0.0518 0.3976 0.7680 1.4076 12.6119 1.3726
VARIANCE 0.2390 0.0019 0.0379 0.0875 0.1876 11.1451 0.9867
VOLUME 6.1721 0.0432 0.6335 1.6396 4.6953 225.2294 18.7033
BEEDLES 0.0298 0.0000 0.0000 0.0000 0.0000 0.7693 0.1242
ABSR 0.1142 0.0000 0.0312 0.0713 0.1428 1.5104 0.1585

Panel D: Large firms sub-sample

(a) Liquidity proxies
AMIHUD − 1.1090 − 55.9482 − 0.5179 − 0.1248 − 0.0312 − 0.0021 4.5980
PS 0.0019 − 4.2067 − 0.0103 0.0001 0.0104 4.8410 0.5253
TURNOVER 0.0299 0.0001 0.0113 0.0232 0.0378 0.3115 0.0326
ZERO 0.8078 0.2541 0.7268 0.8342 0.9176 0.9995 0.1426
LM − 0.4887 − 7.8230 − 0.1245 − 0.0367 − 0.0367 − 0.0366 1.2443
PBA − 0.0127 − 0.0727 − 0.0163 − 0.0103 − 0.0059 − 0.0010 0.0102
(b) Trading characteristics
PRICE 4.8355 0.3371 1.5668 2.8399 5.3850 65.6813 6.6372
VARIANCE 0.0619 0.0016 0.0147 0.0269 0.0514 3.0517 0.2403
VOLUME 14.5892 0.0273 1.6569 5.0866 16.1032 250.1999 26.6769
BEEDLES 0.0068 0.0000 0.0000 0.0000 0.0000 0.5950 0.0572
ABSR 0.0691 0.0000 0.0217 0.0479 0.0896 0.7547 0.0835

Panel E: P-values for tests of equality of means and medians

F-tests KW
KW tests
tests

(a) Liquidity proxies

AMIHUD 0.00** 0.00**
PS 0.99 0.91
TURNOVER 0.00** 0.00**

(continued on next page)

188 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192
Table 2 (continued)
Panel E: P-values for tests of equality of means
Mean Min and medians Lower quartile
F-tests
(a) Liquidity proxies
ZERO 0.00**
LM 0.00**
PBA 0.00**
(b) Trading characteristics
PRICE 0.00**
VARIANCE 0.00**
VOLUME 0.00**
BEEDLES 0.00**
ABSR 0.00**
** and * denote significance at the 1% and 5% levels, respectively.
sized firms do. This suggests that small and large firms are traded
more actively than medium-size firms are. Small firms generally have
a lower total number of shares outstanding. As a result, high turnover
rates are observed among small firms. Since trading volume plays an
important role in estimating TURNOVER and PS, it is not surprising to
see a non-linear pattern across size groups. The relationship between
size and TURNOVER is also similar to those found in prior Australian
studies such as Chan and Faff (2003). Chan and Faff (2003) find that
size is not correlated with turnover.
To compare the difference in values formally, we conduct F-tests
(Kruskal–Wallis (KW) tests) to examine whether the mean (median)
values of an indicated variable are statistically different across the
three size groups. The p-values of these two tests are reported in Panel
E. The null hypothesis of equal means (medians) is rejected for all the
liquidity proxies except PS, which provides evidence that liquidity
varies across the size groups. Regarding trading characteristics, there
is also evidence that the mean and median values vary with firm size.
On average, large firms have higher stock prices, larger trading
volumes and lower return volatility. It should be noted that we cannot
perform the KW tests on BEEDLES because it has zero median values
in each of the size groups. In sum, results in Table 2 support the view
that smaller firms are less liquid when compared to larger firms.
4.2. Correlations
In Table 3, we report the average monthly cross-sectional correlations
between the liquidity proxies and trading characteristics, covering the
period 1991 to 2006. In Panel A, the correlations are shown for the full
sample. We expect that the correlations of liquidity proxies that capture
similar trading behaviours would be stronger. Table 3 shows that the
correlations between liquidity proxies are generally low in the cross-
section except for LM with PBA, ZERO with LM, and ZERO with PBA. Both
ZERO and PBA capture a similar dimension (tightness) of liquidity so their
higher correlation is not surprising. The component of zero trading
volumes in LM is also similar to the concept of ZERO so again, the higher
correlation is expected. These three liquidity proxies also exhibit strong
correlations with SIZE.
Except for LM, both AMIHUD and TURNOVER have low correlations
with the other proxies. The weak correlation between AMIHUD and
TURNOVER is similar to Sadka (2006), who finds that stock turnover has
a low correlation with price impact measures and firm size in the US
market, indicating that volume may not always be a good proxy for
liquidity.9 PS is generally uncorrelated with the liquidity proxies used in
our sample. This finding is also similar to Eckbo and Norli (2002) and
Goyenko et al. (2009) in the US setting.10 Pastor and Stambaugh (2003)
9
Sadka (2006) finds that the cross-sectional correlation between both the Amihud
illiquidity ratio and firm size with stock turnover is close to zero.
10
For example, Eckbo and Norli (2002) find the average time-series correlation
across firms is 0.019 between PS and stock turnover and − 0.023 between PS and
proportional quoted spread.
Median quartile Upper quartile Max Standard deviation
KW tests
0.00**
0.00**
0.00**
0.00**
0.00**
0.00**
NA
0.00**
report that the characteristic of their liquidity measure is sensitive to the
specification of the model given in Eq. (3).11 Further, Panel A shows that
LM tends to have better correlations with all the other proxies. This
finding is consistent with the intuition that LM captures multiple
dimensions of liquidity (Liu, 2006).
Consistent with the findings in Table 2, though small in magnitude,
there is a negative relationship between TURNOVER and SIZE. This result
is similar to Chan and Faff (2003), who find that there is no relationship
between stock turnover and size, and the correlation is −0.064 in the
cross-section in the Australian market. VOLUME is positively related
with all liquidity proxies except for PS. As expected, PRICE is highly
correlated with SIZE and VARIANCE is correlated with ABSR.
Table 2 suggests that firm size has some influence on the relationship
between liquidity and trading characteristics. Accordingly, we consider
to what extent the correlations are impacted by different size groups.
Panels B, C and D of Table 3 report the cross-sectional correlations for the
small, medium-size and large firms, respectively. The correlations are
generally consistent with the results in Panel A. Both AMIHUD and
TURNOVER have stronger correlations with other liquidity proxies (and
size) in each size group. Comparing across the size groups, the
correlations are stronger between liquidity proxies for larger firms.
This result implies that large firms are priced more efficiently than
medium-size and small firms. Moreover, the weak correlations between
the liquidity proxies observed in Panel A might be influenced by the
pattern of trading volume across the size groups as shown in Table 2. Our
results also suggest that while these proxies all capture liquidity to some
extent, they do not necessarily behave similarly because they capture
different dimensions of liquidity.
4.3. Regression results
4.3.1. Basic results
Table 3 shows that the correlations among the employed liquidity
proxies are generally low suggesting that the cross-sectional behaviour
of these proxies is quite divergent. In this section, we run cross-sectional
regressions to understand the sources of liquidity more fully. The
regression results are presented in Table 4. According to our hypotheses,
we expect that stock price and trading volume (volatility) are positively
(negatively) related with stock liquidity.12 From Table 4, except for PS,
trading characteristics are significantly related with the liquidity
proxies. Their influences are generally consistent with the hypotheses
and their impacts are large and highly significant. The impact of the
trading characteristics on PBA and LM is consistent with our hypotheses.
Firms with large prices, large trading volumes and low volatilities tend
11
Pastor and Stambaugh (2003) point out that one can consider 24 alternative
specifications of their model. For example, the dependent variable can be either the
excess or the total stock return. They report that the correlations between liquidity
series generated from different specifications are low.
12
We do not include size in our regression analysis because it is highly correlated
with stock price. Recall that we modified ZERO and flipped the sign of AMIHUD, LM
and PBA to make them liquidity measures. The results are interpreted based on the
modified liquidity proxies.
 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192 189

Table 3
Correlation matrix of liquidity proxies and trading characteristics. AMIHUD is the liquidity ratio from Amihud (2002). PS is the return reversal measure from Pastor and Stambaugh
(2003). TO is the stock turnover rate. ZERO is the zero return measure from Lesmond et al. (1999), but is modified as (1 — the proportion of zero daily returns). LM is the turnover-
adjusted zero daily volumes from Liu (2006). PBA is the proportional bid–ask spread. The sign of AMIHUD, LM and PBA was flipped to make them represent liquidity. PRICE is stock
price at the end of each month. VARIANCE is the variance of daily stock returns. VOLUME is the aggregate trading volume. BEEDLES is the thin trading measure proposed by Beedles
et al. (1988). ABSR is the absolute stock monthly return. All the variables are computed monthly. VOLUME is measured in $millions. PRICE, VOLUME and SIZE are logarithmic
transformed. The correlations reported in the table are the time-series average of the monthly cross-sectional correlations. Stocks are sorted based on their current month's market
capitalisation in each month and then allocated into three equal groups: small, medium and large. Panel A presents the correlations for the entire sample whereas Panels B, C and D
present the correlations for the small firm, medium firm and large firm sample, respectively.

AMIHUD PS TO ZERO LM PBA PRICE VARIANCE VOLUME SIZE ABSR BEEDLES

Panel A: all firms sample

AMIHUD 1
PS − 0.0313 1
TO 0.0981 0.0003 1
ZERO 0.0413 0.0082 0.0505 1
LM 0.2793 0.0023 0.1017 0.3593 1
PBA 0.1974 −0.0076 −0.0737 0.4170 0.5338 1
PRICE 0.1534 −0.0116 −0.0449 0.3483 0.4272 0.6960 1
VARIANCE − 0.0967 0.0034 0.2487 − 0.0762 − 0.1740 −0.5365 −0.3837 1
VOLUME 0.3558 0.0001 0.4331 0.2313 0.4761 0.1529 −0.1465 0.1050 1
SIZE 0.1001 −0.0011 −0.2011 0.5047 0.4703 0.6851 0.8319 − 0.3279 0.2689 1
ABSR − 0.0258 0.0063 0.3754 0.0171 − 0.0822 −0.3038 −0.2791 0.3776 0.1306 −0.2869 1
BEEDLES − 0.0861 0.0022 −0.0328 − 0.1430 − 0.3635 −0.1987 −0.1357 0.0639 − 0.1496 −0.1805 0.0086 1

Panel B: small firms sub-sample

AMIHUD 1
PS − 0.0084 1
TO 0.1284 −0.0009 1
ZERO − 0.0848 0.0151 0.1566 1
LM 0.2091 0.0036 0.2595 0.1417 1
PBA 0.1884 −0.0074 0.0844 0.1907 0.3741 1
PRICE − 0.1495 0.0026 −0.0286 0.3123 − 0.0006 0.4541 1
VARIANCE − 0.1142 0.0067 0.1813 0.0585 − 0.0647 −0.4997 −0.3078 1
VOLUME 0.3285 0.0004 0.5412 − 0.0148 0.4658 −0.0072 −0.6127 0.2257 1
SIZE 0.0630 0.0052 −0.1033 0.1618 0.2915 0.5092 0.4956 − 0.2525 − 0.0506 1
ABSR − 0.0070 0.0124 0.3183 0.1623 0.0442 −0.1837 −0.0685 0.3164 0.2122 −0.1067 1

Panel C: medium-size firms sub-sample

AMIHUD 1
PS − 0.0213 1
TO 0.1745 0.0026 1
ZERO − 0.0143 0.0200 0.1805 1
LM 0.3285 0.0135 0.2398 0.2241 1
PBA 0.2114 −0.0121 0.1154 0.1571 0.3423 1
PRICE − 0.2305 0.0032 −0.1439 0.1781 − 0.1744 0.4176 1
VARIANCE − 0.0193 0.0091 0.2881 0.1552 0.0380 −0.4110 −0.3342 1
VOLUME 0.4075 0.0019 0.5957 0.1156 0.5261 0.0127 −0.6433 0.3053 1
SIZE 0.0145 −0.0019 −0.1117 0.1280 0.1310 0.3774 0.4756 − 0.2094 − 0.0524 1
ABSR 0.0388 0.0103 0.3753 0.2018 0.0972 −0.2000 −0.1589 0.4778 0.2934 −0.1156 1

Panel D: large firms sub-sample

AMIHUD 1
PS − 0.0274 1
TO 0.2082 0.0031 1
ZERO 0.1219 0.0009 0.2247 1
LM 0.4511 −0.0010 0.2072 0.3034 1
PBA 0.4558 0.0037 0.3259 0.4441 0.5446 1
PRICE − 0.1585 0.0045 −0.0560 0.3943 − 0.0503 0.3584 1
VARIANCE − 0.1082 −0.0086 0.2129 0.0780 − 0.0531 −0.3277 −0.2292 1
VOLUME 0.4663 0.0053 0.5940 0.3452 0.5090 0.5527 −0.1719 0.0279 1
SIZE 0.0554 0.0022 0.0906 0.4718 0.1623 0.4983 0.5647 − 0.1786 0.4913 1
ABSR − 0.0351 −0.0076 0.2595 0.1135 − 0.0039 −0.1575 −0.0974 0.4729 0.0585 −0.1088 1

to have higher PBA and LM. The result for PBA is also consistent with
Chordia et al. (2000), Stoll (2000) and Aitken and Frino (1996).
For ZERO, the sign of the coefficients is consistent with our
hypotheses except for VARIANCE and ABSR. Our results indicate that
stocks with higher return fluctuations tend to have a lower proportion of
zero daily returns (i.e. higher liquidity). In general, the price movement
for a stock will be low if its proportion of zero daily returns is high and so
our findings are not surprising. ABSR has the same influence since it is an
alternative measure of volatility. Moreover, firms with large prices and
large trading volumes tend to have fewer zero daily returns.
The positive (negative) coefficient of VOLUME (VARIANCE) in the
AMIHUD regressions indicates that price impacts are smaller for firms
with large volumes and they are larger when the volatility is high. This
finding is consistent with our hypotheses and Stoll (2000). The negative
coefficient of PRICE is puzzling. It indicates that the price movement
associated with trading volume is larger when the prices are large. A
possible explanation is as follows. In Table 2, we find some evidence that
trading volumes are higher for small and large firms (as opposed to
medium-size firms). If a large stock experiences a large price movement,
given the same level of trading volume, it would have a larger price
impact. Our finding is similar to that in Stoll (2000). Stoll (2000) finds that
firms with large prices tend to have higher price impacts on the Nasdaq.
He argues that this result may be influenced by the information that is
incorporated into price.
TURNOVER displays a somewhat different cross-sectional pattern
than the other liquidity measures. The results show that firms with
smaller prices and higher volatilities tend to have higher turnover rates.
These results are not surprising given the findings in Table 2. Small firms
have higher TURNOVER than medium-size and large firms. The
relationship between TURNOVER and BEELDES may look odd at first
190 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192

Table 4
Fama–MacBeth cross-sectional regressions — full sample. Individual stock liquidity proxies are regressed cross-sectionally each month on the concurrent month's closing price
(PRICE), the variance of daily returns for the concurrent month (VARIANCE), monthly aggregate dollar trading volume (VOLUME), monthly absolute stock return (ABSR) and
Beedles' thin trading measure (BEEDLES). PRICE and VOLUME are logarithmic transformed. AMIHUD is the liquidity ratio from Amihud (2002). PS is the return reversal measure from
Pastor and Stambaugh (2003). TURNOVER is the stock turnover rate. ZERO is the zero return measure from Lesmond et al. (1999), but is modified as (1 — the proportion of zero daily
returns). LM is the turnover-adjusted zero daily volumes from Liu (2006). PBA is the proportional bid–ask spread. The sign of AMIHUD, LM and PBA was flipped to make them
represent liquidity. The coefficients are averaged across 189 trading months in the sample. T-statistics are adjusted for first-order auto-correlation and are reported in parentheses
below the coefficient estimates.

Intercept PRICE VARIANCE VOLUME ABSR BEEDLES Adj. R2

Hypothesised sign + − + − −

AMIHUD − 20.2155 − 0.2955 − 158.1188 2.9346 0.1612

(− 38.14)** (− 6.10)** (− 8.44)** (35.58)**
− 19.9357 − 0.4005 − 159.5008 2.9145 − 1.1611 − 1.1331 0.1665
(− 37.05)** (− 8.86)** (− 8.00)** (34.76)** (− 5.12)** (− 5.74)**
PS 0.0311 0.0075 0.8012 − 0.0050 0.0125
(0.61) (1.43) (1.10) (− 0.67)
0.0299 0.0087 0.3065 − 0.0053 0.0376 0.0051 0.0163
(0.59) (1.46) (0.41) (− 0.69) (1.97)* (0.22)
ZERO 0.1934 0.1626 4.7084 0.0817 0.3871
(2.57)** (7.21)** (10.85)** (7.73)**
0.2019 0.1669 3.8426 0.0785 0.1445 − 0.0302 0.4005
(2.83)** (6.93)** (9.31)** (7.44)** (19.04)** (− 7.76)**
TURNOVER − 0.2445 − 0.0065 2.6707 0.0438 0.3897
(− 9.30)** (− 3.93)** (8.08)* * (10.27)**
− 0.2340 − 0.0032 1.4173 0.0403 0.1258 0.0063 0.3413
(− 9.91)** (− 1.79) (6.21)** (11.00)** (14.79)** (4.20)**
LM − 12.367 1.1055 − 37.3496 1.7250 0.3799
(− 40.29)** (25.60)** (− 11.80)** (35.43)**
− 11.4635 0.978 − 34.5721 1.6074 − 0.2549 − 3.7646 0.4506
(− 37.96)** (27.18)** (− 11.18)** (34.05)** (− 4.36)** (− 60.22)**
PBA − 0.1142 0.0309 − 2.7036 0.0135 0.6536
(− 33.69)** (25.61)** (− 11.57)** (25.88)**
− 0.1100 0.0296 − 2.6774 0.0131 − 0.0135 − 0.0168 0.6676
(− 31.57)** (25.00)** (− 12.01)** (24.40)** (− 6.77)** (− 9.91)**

** and * denote significance at the 1% and 5% levels, respectively.

Table 5
Fama–MacBeth cross-sectional regressions — small firm sample. Individual stock liquidity
proxies are regressed cross-sectionally each month on the concurrent month's closing price
(PRICE), the variance of daily returns for the concurrent month (VARIANCE), monthly
aggregate dollar trading volume (VOLUME) and monthly absolute stock return (ABSR). PRICE
and VOLUME are logarithmic transformed. AMIHUD is the liquidity ratio from Amihud
(2002). PS is the return reversal measure from Pastor and Stambaugh (2003). TURNOVER is
the stock turnover rate. ZERO is the zero return measure from Lesmond et al. (1999), but is
modified as (1 — the proportion of zero daily returns). LM is the turnover-adjusted zero daily
volumes from Liu (2006). PBA is the proportional bid–ask spread. The sign of AMIHUD, LM
and PBA was flipped to make them represent liquidity. The coefficients are averaged across
189 trading months in the sample. T-statistics are adjusted for first-order auto-correlation
and are reported in parentheses below the coefficient estimates.
Table 6
Fama–MacBeth cross-sectional regressions — medium-size firm sample. Individual stock
liquidity proxies are regressed cross-sectionally each month on the concurrent month's
closing price (PRICE), the variance of daily returns for the concurrent month (VARIANCE),
monthly aggregate dollar trading volume (VOLUME) and monthly absolute stock return
(ABSR). PRICE and VOLUME are logarithmic transformed. AMIHUD is the liquidity ratio from
Amihud (2002). PS is the return reversal measure from Pastor and Stambaugh (2003).
TURNOVER is the stock turnover rate. ZERO is the zero return measure from Lesmond et al.
(1999), but is modified as (1 — the proportion of zero daily returns). LM is the turnover-
adjusted zero daily volumes from Liu (2006). PBA is the proportional bid–ask spread. The sign
of AMIHUD, LM and PBA was flipped to make them represent liquidity. The coefficients are
averaged across 189 trading months in the sample. T-statistics are adjusted for first-order
auto-correlation and are reported in parentheses below the coefficient estimates.

Intercept PRICE VARIANCE VOLUME ABSR Adj. R2 Intercept PRICE VARIANCE VOLUME ABSR Adj. R2

Hypothesised sign + − + − Hypothesised sign + − + −

AMIHUD − 26.5802 0.4805 −156.7351 4.0127 0.1760 AMIHUD − 21.1798 0.1176 −310.7806 3.1992 0.1992
(− 26.96)** (4.02)** (−7.98)** (24.55)** (− 30.83)** (0.99) (−12.92)** (28.81)**
− 26.8475 0.5101 −156.7451 4.0822 −0.9152 0.1783 − 21.519 0.1427 −306.9715 3.2738 −1.2216 0.2016
(− 27.40)** (4.32)** (−7.96)** (25.18)** (− 3.09)** (− 29.96)** (1.14) (−11.62)** (27.77)** (− 2.67)**
PS − 0.0005 0.0041 0.6785 0.0001 0.0326 PS − 0.0018 0.0133 5.0375 −0.0004 0.0254
(− 0.00) (0.32) (0.72) (0.01) (− 0.03) (1.74) (2.46)* (−0.05)
0.0004 0.003 0.3547 −0.0007 0.0334 0.0348 0.006 0.0099 4.4921 −0.0021 0.0193 0.0281
(0.00) (0.24) (0.34) (−0.04) (1.26) (0.11) (1.25) (1.47) (−0.24) (− 0.45)
ZERO 0.2426 0.2168 4.5105 0.0827 0.2394 ZERO 0.0873 0.1903 17.0387 0.096 0.2092
(6.37)** (7.06)** (9.43)** (15.32)** (3.87)** (9.28)** (11.74)** (29.80)**
0.2709 0.2105 4.0334 0.0752 0.0975 0.2477 0.1165 0.1857 15.3763 0.0896 0.1183 0.2156
(6.65)** (7.06)** (8.31)** (12.48)** (12.42)** (4.76)** (9.38)** (10.92)** (25.32)** (10.85)**
TURNOVER − 0.7362 0.1111 2.0877 0.1387 0.4847 TURNOVER − 0.4494 0.0629 5.0269 0.0784 0.5093
(− 16.89)** (16.51)** (7.75)** (18.20)** (− 10.10)** (11.13)** (8.79)** (10.72)**
− 0.6913 0.1012 1.5129 0.1288 0.0717 0.5131 − 0.4191 0.0571 3.3282 0.0727 0.0617 0.5387
(− 17.21)** (16.51)** (6.78)** (18.53)** (9.76)** (− 10.79)** (12.11)** (6.27)** (11.58)** (10.38)**
LM − 20.5198 2.0748 −29.0121 3.0781 0.3472 LM − 15.4610 1.1357 −81.3121 2.3011 0.3181
(− 87.09)** (43.03)** (−9.99)** (79.30)** (− 44.08)** (35.50)** (−10.65)** (41.60)**
− 21.2028 2.2625 −22.8765 3.2281 −0.6724 0.374 − 15.8823 1.2284 −70.7545 2.3791 −0.3394 0.3393
(− 92.66)** (41.35)** (−8.54)** (84.47)** (− 7.73)** (− 48.32)** (36.82)** (−9.40)** (46.77)** (− 2.92)**
PBA − 0.2184 0.0549 −2.6395 0.0323 0.5310 PBA − 0.1240 0.0281 −3.4188 0.0163 0.4521
(− 30.60)** (29.84)** (−12.88)** (28.39)** (− 32.29)** (37.76)** (−12.39)** (25.77)**
− 0.2275 0.0564 −2.4560 0.0345 −0.0265 0.5516 − 0.1270 0.0284 −3.1708 0.0169 −0.0159 0.4697
(− 32.89)** (30.76)** (−13.13)** (30.86)** (− 13.45)** (− 31.85)** (38.99)** (−11.97)** (25.81)** (− 8.46)**

** and * denote significance at the 1% and 5% levels, respectively. ** and * denote significance at the 1% and 5% levels, respectively.
 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192 191

glance, but this relationship is also consistent with the findings in Table 2.
Non-zero values of BEEDLES are mainly concentrated in small firms,
which also have higher TURNOVER on average.
We find no relationship between PS and trading characteristics.
This indicates that the sources of the return reversal measure are not
related to stocks' trading characteristics. It is important to note that
Pastor and Stambaugh (2003) did not assign their liquidity measure to
individual stocks. They argue that while their liquidity measure is
imprecise for individual stocks, their market-wide liquidity measure
becomes more precise as the sample size increases. Therefore, we
have to be cautious about applying PS to individual stocks.
Table 7
Fama–MacBeth cross-sectional regressions — large firm sample. Individual stock liquidity
proxies are regressed cross-sectionally each month on the concurrent month's closing price
(PRICE), the variance of daily returns for the concurrent month (VARIANCE), monthly
aggregate dollar trading volume (VOLUME) and monthly absolute stock return (ABSR). PRICE
and VOLUME are logarithmic transformed. AMIHUD is the liquidity ratio from Amihud
(2002). PS is the return reversal measure from Pastor and Stambaugh (2003). TURNOVER is
the stock turnover rate. ZERO is the zero return measure from Lesmond et al. (1999), but is
modified as (1 — the proportion of zero daily returns). LM is the turnover-adjusted zero daily
volumes from Liu (2006). PBA is the proportional bid–ask spread. The sign of AMIHUD, LM
and PBA was flipped to make them represent liquidity. The coefficients are averaged across
189 trading months in the sample. T-statistics are adjusted for first-order auto-correlation
and are reported in parentheses below the coefficient estimates.

Stoll (2000) points out that if the relationships with stock character- Intercept PRICE VARIANCE VOLUME ABSR Adj. R2
istics are the same using different liquidity proxies, liquidity is simply a Hypothesised sign + − + −
one-dimensional concept. If not, liquidity is a multifaceted concept. Our
AMIHUD −17.632 −1.5249 −1061.1613 2.6711 0.2574
results support the notion that liquidity is multidimensional, and that it (−25.77)** (− 9.75)** (− 10.43)** (24.13)**
can be viewed from different aspects of trading behaviour. −17.5842 −1.5511 −1151.2270 2.6696 −0.0608 0.2617
(−26.43)** (− 9.66)** (− 9.97)** (24.55)** (−0.11)
PS 0.0559 0.0372 18.0408 −0.0123 0.0583
4.3.2. Robustness check: size groups (0.52) (1.59) (1.31) (−0.71)
As a robustness check, the influences of trading characteristics on 0.061 0.0369 21.901 −0.0128 −0.0573 0.0634
liquidity across the size groups are examined. The BEEDLES measure is (0.54) (1.59) (1.10) (−0.72) (−0.49)
ZERO 0.1199 0.1858 46.5322 0.0881 0.386
excluded because all stocks within a size group have zero values for (2.33)* (56.42)** (11.58)** (11.91)**
BEEDLES in some months. Tables 5, 6 and 7 report regression results 0.1166 0.1866 43.0804 0.0875 0.1285 0.3925
for small, medium and large size firms, respectively. The results in the (2.31)* (57.90)** (8.84)** (11.94)** (8.63)**
TURNOVER −0.1424 0.0070 10.1079 0.0245 0.4295
size groups are similar to those found in the main analysis. The (−11.14)** (8.70)** (7.58)** (12.40)**
influences of trading characteristics on ZERO, PBA and LM remain −0.1402 0.0068 7.0283 0.0237 0.0646 0.4699
consistent across the size groups. Trading characteristics continue to (−10.86)** (7.46)** (5.81)** (12.34)** (10.73)**
LM −6.2956 0.0904 −115.5866 0.8804 0.2473
show no explanatory power on PS. (−23.30)** (5.01)** (− 6.18)** (21.41)**
PRICE becomes positively related with TURNOVER in the size groups, −6.3265 0.0722 −120.3095 0.8885 0.0669 0.2699
which is consistent with expectations. This indicates that stocks with (−22.24)** (4.46)** (− 6.23)** (20.47)** (0.57)
PBA −0.0739 0.0097 −4.5445 0.0088 0.5721
higher prices have higher turnover rates in each size category. The
(−21.42)** (24.22)** (− 8.26)** (18.58)**
relationship between PRICE and AMIHUD is consistent with our −0.0736 0.0097 −4.3551 0.0088 −0.0054 0.5775
hypothesis in the small size group. Stocks with lower prices tend to (−21.73)** (23.91)** (− 10.00)** (18.76)** (−4.09)**
have higher price impacts. The relationship between PRICE and AMIHUD ** and * denote significance at the 1% and 5% levels, respectively.
disappears in the medium-size group and becomes negative for large
firms. This indicates that the negative relationship between PRICE and
AMIHUD observed in Table 4 may be driven by large size firms.

5. Conclusion
The role of liquidity in generating stock returns has been examined in
the Australian equity market (e.g. see Chan and Faff, 2003; Marshall and
Young, 2003). In this paper, we take a step further and examine the
relationships between liquidity proxies and the influences of trading
characteristics on stock liquidity in the pure order-driven market of
Australia. Prior studies that have examined similar research issues mainly
focus on liquidity proxies constructed from microstructure data. There are
many situations in which little or no microstructure data are available and
in these cases, we have much less guidance on the best way to proceed.
This gap in the literature motivates the current research to use liquidity
proxies constructed from low-frequency data. In this paper, we examine
the relationship between liquidity and stocks' trading characteristics, such
as price per share, return volatility and trading volume in the Australian
market. We mainly focus on trading characteristic variables because data
for these variables are relatively accessible, and they have been shown to
be important sources of liquidity.
We find that the correlations among the employed liquidity proxies
are low in the cross-section. This implies that they represent different
dimensions of liquidity and a certain type of trading behaviour. Stoll
(2000) also notes that different liquidity measures need not be
correlated for similar reasons. Consistent with the literature, trading
characteristics are important determinants of liquidity. However, their
relationships with stock turnover and the return reversal measure
exhibit a somewhat different pattern than the other liquidity proxies.
In particular, the return reversal measure does not depend on stocks'
trading characteristics. This result suggests that the source of the
return reversal measure is not related to stock characteristics that are
important for the other proxies. This also implies that the return
reversal effect is small in the Australian market. In addition, we find
that small and large firms have a higher average volume than medium-
size firms do. This suggests that trading may be more focused on small
and large firms in Australia. However, we are not claiming that higher
trading volume necessarily indicates higher liquidity.13 In addition,
based on other liquidity proxies, small firms do not necessarily have
higher liquidity than medium-sized firms do.
Notably, we have been silent on the question of what is the “best”
liquidity proxy. This research issue is beyond the scope of the current
study. However, as noted in Goyenko et al. (2009), the selection of
liquidity proxies in an empirical design depends on what exactly one
wants to capture. Our results support their assertion, as liquidity is
multidimensional and can be captured by different measures of trading
activity. The current study shows that through firm trading character-
istics, we can better understand the sources of liquidity.
Acknowledgements
The helpful comments of an anonymous referee and the financial
support provided by an ARC Linkage Grant (LP0453913) are gratefully
acknowledged.
13
Pastor and Stambaugh (2003) note that it is often the case that volume is high
when liquidity is low. This is especially the case during periods of financial crisis or
stress. The problem with using trading volume as a proxy for liquidity is also discussed
in Chordia et al. (2002).
192 D. Chai et al. / International Review of Financial Analysis 19 (2010) 181–192
References
Aitken, M., & Frino, A. (1996). The determinants of market bid ask spreads on the
Australian stock exchange: Cross-sectional analysis. Accounting and Finance, 36(1),
51−64.
Amihud, Y. (2002). Illiquidity and stock returns: Cross section and time series effects.
Journal of Financial Markets, 5(1), 31−56.
Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid–ask spread. Journal of
Financial Economics, 17(2), 223−249.
Atkins, A. B., & Dyl, E. A. (1997). Transactions costs and holding periods for common
stocks. Journal of Finance, 52(1), 309−325.
Beedles, W., Dodd, P., & Officer, R. R. (1988). Regularities in Australian share returns.
Australian Journal of Management, 13(1), 1−29.
Bekaert, G., Harvey, C. R., & Lundblad, C. (2007). Liquidity and expected returns: Lessons
from emerging markets. Review of Financial Studies, 20(6), 1783−1831.
Benson, G. J., & Hagerman, R. L. (1974). Determinants of bid–asked spreads in the over-
the-counter market. Journal of Financial Economics, 1(4), 353−364.
Black, F. (1971). Towards a fully automated exchange: Part 1. Financial Analyst Journal,
27(4), 29−34.
Branch, B., & Freed, W. (1977). Bid–asked spreads on the AMEX and the big board.
Journal of Finance, 32(1), 159−163.
Brennan, M. J., & Subrahmanyam, A. (1996). Market microstructure and asset pricing:
On the compensation for illiquidity in stock returns. Journal of Financial Economics,
41(3), 441−464.
Brown, D. P., & Zhang, Z. M. (1997). Market orders and market efficiency. Journal of
Finance, 52(1), 277−308.
Chan, H. W. H., & Faff, R. W. (2003). An investigation into the role of liquidity in asset
pricing: Australian evidence. Pacific-Basin Finance Journal, 11(5), 555−572.
Chordia, T., Roll, R., & Subrahmanyam, A. (2000). Commonality in liquidity. Journal of
Financial Economics, 56(1), 3−28.
Chordia, T., Roll, R., & Subrahmanyam, A. (2002). Order imbalance, liquidity and market
returns. Journal of Financial Economics, 65(1), 111−130.
Chordia, T., Shivakumar, L., & Subrahmanyam, A. (2004). Liquidity dynamics across
small and large firms. Economic Notes, 33(1), 111−143.
Cochrane, J. (2001). Asset pricing. New Jersey: Princeton University Press.
Datar, V., Naik, N. Y., & Radcliffe, R. (1998). Liquidity and stock returns: An alternative
test. Journal of Financial Markets, 1(2), 203−219.
Demsetz, H. (1968). The costs of transacting. Quarterly Journal of Economics, 82(1),
33−53.
Ding, Z., Granger, C. W., & Engle, R. F. (1993). A long memory property of stock market
returns and a new model. Journal of Empirical Finance, 1(1), 83−106.
Duffee, G. R. (1995). Stock returns and volatility a firm-level analysis. Journal of
Financial Economics, 37(3), 399−420.
Eckbo, E. B., & Norli, O. (2002). Pervasive liquidity risk. Dartmouth College Working
Paper.
Fama, E. F., & MacBeth, J. D. (1973). Risk, return and equilibrium empirical test. Journal
of Political Economy, 81(3), 607−636.
Glosten, L. R. (1994). Equilibrium in an electronic open limit order book. Journal of
Finance, 49(5), 1127−1161.
Goyenko, R., Holden, G. W., & Trzcinka, C. A. (2009). Do liquidity measures measure
liquidity? Journal of Financial Economics, 92(2), 153−181.
Grossman, S., & Miller, M. (1988). Liquidity and market structure. Journal of Finance, 21(3),
617−633.
Handa, P., Schwartz, R., & Tiwari, A. (1998). The ecology of an order-driven market.
Journal of Portfolio Management, 24(2), 47−55.
Hasbrouck, J. (2009). Trading costs and returns for U.S. equities: Estimating effective
costs from daily data. Journal of Finance, 64(3), 1445−1477.
Kyle, A. (1985). Continuous auctions and insider trading. Econometrica, 53(6), 1315−1335.
Lee, C. M., & Swaminathan, B. (2000). Price momentum and trading volume. Journal of
Finance, 55(5), 2017−2069.
Lesmond, D. A., Ogden, J. P., & Trzcinka, C. A. (1999). A new estimate of transaction costs.
Review of Financial Studies, 12(5), 1113−1141.
Liu, W. (2006). A liquidity-augmented capital asset pricing model. Journal of Financial
Economics, 82(3), 631−671.
Llorente, G., Michaely, R., Saar, G., & Wang, J. (2002). Dynamic volume–return relation
of individual stocks. Review of Financial Studies, 15(4), 1005−1047.
Marshall, B., & Young, M. (2003). Liquidity and stock returns in pure order-driven
markets: Evidence from the Australian stock market. International Review of
Financial Analysis, 12(2), 173−188.
Pastor, L., & Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. Journal
of Political Economy, 111(3), 642−685.
Petersen, M. A. (2009). Estimating standard errors in finance panel data sets:
Comparing approaches. Review of Financial Studies, 22(1), 435−480.
Sadka, R. (2006). Momentum and post-earnings-announcement drift anomalies: The
role of liquidity risk. Journal of Financial Economics, 80(2), 209−249.
Stoll, H. (1978). The pricing of security dealer services: An empirical study of NASDAQ
stocks. Journal of Finance, 33(4), 1153−1172.
Stoll, H. (2000). Friction. Journal of Finance, 55(4), 1479−1514.
Stoll, H., & Whaley, R. (1983). Transaction costs and the size effect. Journal of Financial
Economics, 12(1), 57−79.
Tinic, S. (1972). The economics of liquidity services. Quarterly Journal of Economics, 86(1),
79−93.