Is Illiquidity a Risk Factor? A Critical Look at Commission Costs

Posted: 2 Aug 2007

See all articles by Jinliang Li

Jinliang Li

Tsinghua University

Robert M. Mooradian

Northeastern University, D’Amore-McKim School of Business, Finance Area

Wei David Zhang

Arizona State University (ASU) - School of Global Management and Leadership

Abstract

A quarterly time series of the aggregate commission rate for NYSE trading over 1980-2003 allowed an investigation of the information conveyed by this liquidity risk metric and analysis of its critical role in the generation of stock returns. The aggregate commission rate was found to be highly correlated with other illiquidity metrics, such as the bid-ask spread. The rate is significantly and positively related to the excess returns of the stock market portfolio and has significant explanatory power for the cross-sectional variation in stock returns. An analysis of size-based portfolios indicates that returns become more sensitive to the aggregate commission rate with declining market capitalization.

Keywords: Financial Markets: Market Microstructure, Portfolio Management: Trading and Execution

Suggested Citation

Li, Jinliang and Mooradian, Robert M. and Zhang, Wei David, Is Illiquidity a Risk Factor? A Critical Look at Commission Costs. Financial Analysts Journal, Vol. 63, No. 4, pp. 28-39, July/August 2007, Available at SSRN: https://ssrn.com/abstract=1002970

Jinliang Li (Contact Author)

Tsinghua University ( email )

1 Tsinghua Yuan
Beijing, 100084
China

Robert M. Mooradian

Northeastern University, D’Amore-McKim School of Business, Finance Area ( email )

Boston, MA 02115
United States
617-373-5955 (Phone)
617-373-8798 (Fax)

Wei David Zhang

Arizona State University (ASU) - School of Global Management and Leadership

P.O. Box 37100
Phoenix, AZ 85069
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
853
PlumX Metrics