Abstract
Stock liquidity is unobservable, and thus, its level needs to be approximated. There is a large body of liquidity measures recorded in the existing literature. The main goal of this paper is to investigate which measure is the most appropriate one to measure stock liquidity for the purposes of asset pricing studies on the Warsaw Stock Exchange. To indicate the most appropriate proxy for liquidity, a series of correlation analysis between different liquidity measures and estimation error measures have been applied. Four high-frequency liquidity measures were used as a benchmark for liquidity, and fourteen low-frequency liquidity proxies were examined. The study was conducted on a group of 100 companies listed on the Warsaw Stock Exchange between 2006 and 2016. The ranking of low-frequency proxies for liquidity has been created based on eleven performance dimensions. It shows that the most appropriate liquidity measure on the Warsaw Stock Exchange is that developed by Fong et al. [12], which is a simplification of the zero-return-days measure developed by Lesmond et al. [20]. In addition, two modifications of Amihud’s [2] illiquidity are presented as the second and third best-performing ones. To the best of the author’s knowledge, this is the first such extensive study of the performance of liquidity measures on the Warsaw Stock Exchange. It examines both existing liquidity measures and some modifications proposed on the basis of the literature overview.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Acharya, V.V., Pedersen, L.H.: Asset pricing with liquidity risk. J. Financ. Econ. 77(2), 375–410 (2005). https://doi.org/10.1016/j.jfineco.2004.06.007
Amihud, Y.: Illiquidity and stock returns: cross-section and time-series effects. J. Financ. Markets 5(1), 31–56 (2002). https://doi.org/10.1016/S1386-4181(01)00024-6
Amihud, Y., Hameed, A., Kang, W., et al.: The illiquidity premium: International evidence. J. Financ. Econ. 117(2), 350–368 (2015). https://doi.org/10.1016/j.jfineco.2015.04.005
Amihud, Y., Mendelson, H.: Asset pricing and the bid-ask spread. J. Financ. Econ. 17(2), 223–249 (1986). https://doi.org/10.1016/0304-405X(86)90065-6
Bekaert, G., Harvey, C.R., Lundblad, C.: Liquidity and stock returns: lessons from emerging markets. Rev. Financ. Stud. 20(6), 1783–1831 (2007). https://doi.org/10.1093/rfs/hhm030
Będowska-Sójka B (2018) The coherence of liquidity measures: the evidence from the emerging market. Finance Research Letters, Article in press. https://doi.org/10.1016/j.frl.2018.02.014
Bleaney, M., Li, Z.: The performance of bid-ask spread estimators under less than ideal conditions. Stud. Econ. Financ. 32(1), 98–127 (2015). https://doi.org/10.1108/SEF-04-2014-0075
Brennan, M.J., Chordia, T., Subrahmanyam, A.: Alternative factor specifications, security characteristics, and the cross-section of expected stock returns. J. Financ. Econ. 49(3), 345–373 (1998). https://doi.org/10.1016/S0304-405X(98)00028-2
Choi, J.Y., Salandro, D., Shastri, K.: On the estimation of bid ask spreads: theory and evidence. J. Financ. Quant. Anal. 23(2), 219–230 (1988). https://doi.org/10.2307/2330882
Chu, Q.C., Ding, D.K., Pyun, C.S.: Bid ask bounce and spreads in the foreign exchange futures market. Rev. Quant. Financ. Acc. 6(1), 19–37 (1996). https://doi.org/10.1007/BF00290794
Corwin, S.A., Schultz, P.: A simple way to estimate bid-ask spread from daily high and low prices. J. Financ. 67(2), 719–759 (2012). https://doi.org/10.1111/j.1540-6261.2012.01729.x
Fong, K.Y.L., Holden, C.W., Trzcinka, C.A.: What are the best liquidity proxies for global research? Rev. Financ. 21(4), 1355–1401 (2017). https://doi.org/10.1093/rof/rfx003
Gao, Y., Wang, M.: A new effective spread estimator based on price range. Available at SSRN https://ssrn.com/abstract=2895360 (2017). Accessed 13 Feb 2017
Gârleanu, N.: Portfolio choice and pricing in illiquid markets. J. Econ. Theory 144(2), 532–564 (2009). https://doi.org/10.1016/j.jet.2008.07.006
Gârleanu, N., Pedersen, L.H.: Dynamic trading with predictable returns and transaction costs. J. Financ. 68(6), 2309–2340 (2013). https://doi.org/10.1111/jofi.12080
Garsztka, P.: Konstrukcja portfela papierów wartościowych z uwzględnieniem płynności walorów. Zesz. Nauk. Uniw. Ekonomicznego w Poznaniu 242, 56–68 (2012)
Gonzalez, A., Rubio, G.: Portfolio choice and the effects of illiquidity. SERIEs 2(1), 53–74 (2007). https://doi.org/10.1007/s13209-010-0025-4
Goyenko, R.Y., Holden, C.W., Trzcinka, C.A.: Do liquidity measures measure liquidity? J. Financ. Econ. 92(2), 153–181 (2009). https://doi.org/10.1016/j.jfineco.2008.06.002
Hasbrouck, J.: Trading costs and returns for US equities: estimating effective costs from daily data. J. Financ. 64(3), 1445–1477 (2009). https://doi.org/10.1111/j.1540-6261.2009.01469.x
Lesmond, D.A., Ogden, J.P., Trzcinka, C.A.: A new estimate of transaction costs. Rev. Financ. Stud. 12(5), 1113–1141 (1999). https://doi.org/10.1093/rfs/12.5.1113
Longstaff, F.A.: Optimal portfolio choice and the valuation of illiquid securities. Rev. Financ. Stud. 14(2), 407–431 (2001). https://doi.org/10.1093/rfs/14.2.407
Nyborg, K.G., Östberg, P.: Money and liquidity in financial markets. J. Financ. Markets 112(1), 30–52 (2014). https://doi.org/10.1016/j.jfineco.2013.12.003
Olbryś, J.: Wycena aktywów kapitałowych na rynku z zakłóceniami w procesach transakcyjnych. Difin, Warsaw (2014)
Pástor, L., Stambaugh, R.F.: Liquidity risk and expected stock returns. J. Polit. Econ. 111(3), 642–685 (2003). https://doi.org/10.1086/374184
Pereira, J.P., Zhang, H.H.: Stock returns and the volatility of liquidity. J. Financ. Quant. Anal. 45(4), 1077–1110 (2010). https://doi.org/10.1017/S0022109010000323
Porcenaluk, P.: Zastosowanie kowariancji do szacowania spreadu bid-ask dla akcji notowanych na GPW w Warszawie. Zeszyty Naukowe Uniwersytetu Szczecińskiego. Finanse Rynki Finansowe Ubezpieczenia 75, 403–410 (2015). https://doi.org/10.18276/frfu.2015.75-33
Roll, R.: A simple implicit measure of the effective bid-ask spread in an efficient market. J. Financ. 39(4), 1127–1139 (1984). https://doi.org/10.1111/j.1540-6261.1984.tb03897.x
Stereńczak, S.: Przydatność wybranych miar płynności akcji na Giełdzie Papierów Wartościowych w Warszawie. Finanse Rynki Finansowe Ubezpieczenia 89(2), 207–218 (2017). https://doi.org/10.18276/frfu.2017.89/2-15
Thompson, S.R., Waller, M.L.: The execution cost of trading in commodity futures markets. Food Res. Inst. Stud. 20(2), 141–163 (1987)
Tobek, O.: Liquidity proxies based on trading volume. Available at SSRN https://ssrn.com/abstract=2736584 (2016). Accessed 28 Jan 2017
Zhao, W., Wang, M.: On the computation of LOT liquidity measure. Econ. Lett. 136, 76–80 (2015). https://doi.org/10.1016/j.econlet.2015.08.030
Acknowledgements
I am grateful for helpful comments from Jarosław Kubiak and Paweł Miłobędzki. The study was financed by the National Science Centre, Poland, as a research project (2017/27/N/HS4/00751).
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 Springer Nature Switzerland AG
About this paper
Cite this paper
Stereńczak, S. (2019). In Search of the Best Proxy for Liquidity in Asset Pricing Studies on the Warsaw Stock Exchange . In: Tarczyński, W., Nermend, K. (eds) Effective Investments on Capital Markets. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-21274-2_3
Download citation
DOI: https://doi.org/10.1007/978-3-030-21274-2_3
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-21273-5
Online ISBN: 978-3-030-21274-2
eBook Packages: Economics and FinanceEconomics and Finance (R0)