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Measuring the Liquidity Part of Volume

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Date
2015
Dewey
Economie financière
Sujet
Volatility-volume relationship; Mixture of distribution hypothesis; Information-based trading; Liquidity shocks; GMM tests; Liquidity arbitrage
JEL code
C.C5.C51; C.C5.C52; G.G1.G12
Journal issue
Journal of Banking and Finance
Volume
50
Publication date
2015
Article pages
92–105
Publisher
Elsevier
DOI
http://dx.doi.org/10.1016/j.jbankfin.2014.09.007
URI
https://basepub.dauphine.fr/handle/123456789/14040
Collections
  • DRM : Publications
Metadata
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Author
Darolles, Serge
1032 Dauphine Recherches en Management [DRM]
Le Fol, Gaëlle
1032 Dauphine Recherches en Management [DRM]
Mero, Gulten
Type
Article accepté pour publication ou publié
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.

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