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Liquidity as Price Effect on Time to Sale

Author

Listed:
  • Keunkwan Ryu

    (Seoul National University)

  • Hyun-yeol Shin

    (The Bank of Korea)

Abstract

This paper proposes a new empirical measure of liquidity, termed “liquidity delta.†An asset is considered liquid if it can be traded quickly, in large quantities at low cost with little impact on market price. Trade-off between asking price and sale intensity, is one of the most common characteristics of assets. The new measure, liquidity delta, empirically captures this trade-off. We estimate liquidity delta for sixty major stocks listed on the Korea Stock Exchange. We demonstrate that liquidity delta is a useful measure of liquidity, with liquidity level and its variability showing negative and positive relation, respectively, with the asset's rate of return. The negative relationship shows premium for lack of liquidity whereas the positive one shows premium for liquidity risk.

Suggested Citation

  • Keunkwan Ryu & Hyun-yeol Shin, 2010. "Liquidity as Price Effect on Time to Sale," Korean Economic Review, Korean Economic Association, vol. 26, pages 307-340.
    • Handle: RePEc:kea:keappr:ker-20101231-26-2-04
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Liquidity; Excess asking price; Duration analysis; Hazard ratio; Liquidity delta;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other

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