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Which stock price component drives the Amihud illiquidity premium? |
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| Institution: | 1. School of Economics, University of Seoul, 163 Seoulsiripdae-ro, Dongdaemun-gu, Seoul 02504, South Korea;2. Department of International Finance, Hankuk University of Foreign Studies, 81, Oedae-ro, Cheoin-gu, Yongin-si, Gyeonggi-do 17035, South Korea;1. Indian Statistical Institute, Kolkata, India;2. Centre for Studies in Social Sciences, Kolkata, India;3. Indian Institute of Foreign Trade (IIFT), Kolkata Campus, India;4. CESifo, Germany;5. Faculty of Business, The Hong Kong Polytechnic University, Hong Kong |
| Abstract: | We examine the components of stock prices that play a key role in the pricing of the Amihud (2002) illiquidity measure. We first decompose the stock price series into permanent and transitory components and then construct the half-Amihud illiquidity measures on the days of positive and negative permanent price returns. We find that the transitory half-Amihud measure on the days of negative permanent price returns plays an important role in pricing the Amihud illiquidity even after controlling for the turnover ratio. This finding contrasts with that of Lou and Shu (2017) in that both the trading volume component and transitory price impact, drive the Amihud illiquidity premium. |
| Keywords: | Amihud illiquidity premium Permanent and transitory prices Half-Amihud measure |
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