Alternative Liquidity Measures and Stock Returns

Abstract. This article compares the properties of several common liquidity measures including the bid-ask spread, the liquidity ratio and firm size. We also use the proportional hazard model to develop a new measure, the relative odds ratio, based on the volume necessary to move prices by a predetermined amount. Although each measure displays a liquidity premium, a composite measure better explaims expected returns, suggesting that liquidity is a multidimensional phenomenon.