Liquidity Measures, Liquidity Drivers and Expected Returns on an Early Call Auction Market

36 Pages Posted: 30 Aug 2011

See all articles by Carsten Burhop

Carsten Burhop

Max Planck Institute for Research on Collective Goods

Sergey Gelman

National Research University Higher School of Economics (Moscow); JMSB, Concordia University

Date Written: July 1, 2011

Abstract

We analyze the determinants of illiquidity and its impact on asset pricing for purely call auction traded stocks on Berlin Stock Exchange using 22 years of daily data (1892-1913). We use the Lesmond et al. (1999) measure of transaction costs to proxy illiquidity. We show that transaction costs were low and comparable to today’s costs. Liquidity was negatively correlated with active informed trading, particularly being low for small and distressed stocks and in crises times. Liquidity concerns were a major driver of asset pricing: we find significant illiquidity level and illiquidity risk premia as well as an explicit premium for informed trading.

Keywords: transaction costs, liquidity premium, informed trading

JEL Classification: G12, G14, N23

Suggested Citation

Burhop, Carsten and Gelman, Sergey and Gelman, Sergey, Liquidity Measures, Liquidity Drivers and Expected Returns on an Early Call Auction Market (July 1, 2011). MPI Collective Goods Preprint, No. 2011/19, Available at SSRN: https://ssrn.com/abstract=1919522 or http://dx.doi.org/10.2139/ssrn.1919522

Carsten Burhop (Contact Author)

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Sergey Gelman

National Research University Higher School of Economics (Moscow) ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

JMSB, Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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