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Measuring the Liquidity Part of Volume

Darolles, Serge; Le Fol, Gaëlle; Mero, Gulten (2015), Measuring the Liquidity Part of Volume, Journal of Banking and Finance, 50, p. 92–105. 10.1016/j.jbankfin.2014.09.007

Type
Article accepté pour publication ou publié
Date
2015
Journal name
Journal of Banking and Finance
Volume
50
Publisher
Elsevier
Pages
92–105
Publication identifier
10.1016/j.jbankfin.2014.09.007
Metadata
Show full item record
Author(s)
Darolles, Serge
Dauphine Recherches en Management [DRM]
Le Fol, Gaëlle
Dauphine Recherches en Management [DRM]
Mero, Gulten
Abstract (EN)
Based on the concept that the presence of liquidity frictions can increase the daily traded volume, we develop an extended version of the mixture of distribution hypothesis model (MDH) along the lines of Tauchen and Pitts (1983) to measure the liquidity portion of volume. Our approach relies on a structural definition of liquidity frictions arising from the theoretical framework of Grossman and Miller (1988), which explains how liquidity shocks affect the way in which information is incorporated into daily trading characteristics. In addition, we propose an econometric setup exploiting the volatility–volume relationship to filter the liquidity portion of volume and infer the presence of liquidity frictions using daily data. Finally, based on FTSE 100 stocks, we show that the extended MDH model proposed here outperforms that of Andersen (1996) and that the liquidity frictions are priced in the cross-section of stock returns.
Subjects / Keywords
Volatility-volume relationship; Mixture of distribution hypothesis; Information-based trading; Liquidity shocks; GMM tests; Liquidity arbitrage
JEL
C51 - Model Construction and Estimation
C52 - Model Evaluation, Validation, and Selection
G12 - Asset Pricing; Trading Volume; Bond Interest Rates

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