Do Liquidity Measures Measure Liquidity?
2009, Journal of Financial Economics
Ruslan Goyenko, Craig Holden, Charles Trzcinka
Given the key role of liquidity in finance research, identifying high quality proxies based on daily (as opposed to intraday) data would permit liquidity to be studied over relatively long time frames and across many countries. Using new measures and widely employed measures in the literature, we run horse races of annual and monthly estimates of each measure against liquidity benchmarks. Our benchmarks are effective spread, realized spread, and price impact based on both Trade and Quote (TAQ) and Rule 605 data.We find that the new effective/realized spread measures win the majority of horse races, while the Amihud [2002. Illiquidity and stock returns: cross-section and
time-series effects. Journal of Financial Markets 5,31–56] measure does well measuring price impact.
Goyenko, Ruslan Y., Craig W. Holden, and Charles A. Trzcinka (2009), "Do Liquidity Measures Measure Liquidity?," Journal of Financial Economics, Vol. 92, No. 2, May, pp. 153-181.
Winner second place Fama-DFA award for best 2009 paper in asset pricing.