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Indiana University Bloomington

Department of Finance

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Research and Publications

Journal Articles

Do Liquidity Measures Measure Liquidity?

2009, Journal of Financial Economics

Ruslan Goyenko, Craig W. Holden, Charles A. Trzcinka

Abstract

Given the key role of liquidity in finance research, identifying high quality proxies based
on daily (as opposed to intraday) data would permit liquidity to be studied over
relatively long timeframes and across many countries.Using new measures and widely
employed measures in the literature, we run horseraces of annual and monthly
estimates of each measure against liquidity benchmarks. Our benchmarks are effective
spread, realized spread, and price impact based on both Trade and Quote (TAQ) and Rule
605 data.We find that the new effective / realized spread measures win the majority of
horseraces, while the Amihud [2002. Illiquidity and stock returns: cross-section and
time-series effects.Journal of Financial Markets 5, 31–56] measure does well measuring
price impact.

Citation

Goyenko, Ruslan, Craig W. Holden, and Charles A. Trzcinka (2009), “Do Liquidity Measures Measure Liquidity?,” Journal of Financial Economics, Vol. 92, No. 2, May, pp. 153-181.

Notations

Lead Article.

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