Cost of Transacting and Expected Returns in the Nasdaq Market

Eleswarapu, Venkat R.

doi:10.1111/j.1540-6261.1997.tb02754.x

Cited by 144 publications

(59 citation statements)

References 19 publications

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“…1 Consequently, the estimated effect of the bidask spread is expected to be stronger when using Nasdaq stocks. This is indeed the finding by Eleswarapu (1997), who estimates a model where the stock return is regressed on the stock's beta, relative spread, and log(size). The estimation is performed for individual stocks employing the Fama and MacBeth (1973) method.…”

Section: Cross-section Testsmentioning

confidence: 88%

Liquidity and Asset Prices

2005

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We review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories. The theory predicts that both the level of liquidity and liquidity risk are priced, and empirical studies find the effects of liquidity on asset prices to be statistically significant and economically important, controlling for traditional risk measures and asset characteristics. Liquidity-based asset pricing empirically helps explain (1) the cross-section of stock returns, (2) how a reduction in stock liquidity result in a reduction in stock prices and an increase in expected stock returns, (3) the yield differential between on-and off-the-run Treasuries, (4) the yield spreads on corporate bonds, (5) the returns on hedge funds, (6) the valuation of closed-end funds, and (7) the low price of certain hard-to-trade securities relative to more liquid counterparts with identical cash flows, such as restricted stocks or illiquid derivatives. Liquidity can thus play a role in resolving a number of asset pricing puzzles such as the small-firm effect, the equity premium puzzle, and the risk-free rate puzzle.

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Section: Cross-section Testsmentioning

confidence: 88%

Liquidity and Asset Prices

2005

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“…In a seminal paper, Amihud and Mendelson (1986) develop a model and empirical tests to demonstrate that asset returns are positively related to their proxy for illiquidity, that is, the relative bid-ask spread. Other evidence supports and explores these findings (e.g., see Amihud and Mendelson, 1989;Eleswarapu, 1997;Jacoby et al 2000;Gottesman and Jacoby, 2006).…”

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confidence: 71%

Value investing or investing in illiquidity? The profitability of contrarian investment strategies, revisited

Gottesman

Jacoby

2017

Financ Innov

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Background: We investigate whether the success of contrarian investment strategies can be attributed to differences in the relative illiquidity of stocks categorized as value investments versus those categorized as glamour portfolios. Methods: Following Lakonishok et al. (J Financ 49:1541(J Financ 49: -1578(J Financ 49: , 1994, we assess the illiquidity characteristics of portfolios that underlie contrarian investment strategies that are based on the level of stock's book to market. Results: We find strong evidence that those portfolios characterized as value investments are associated with dramatically greater levels of illiquidity than glamour portfolios. We further demonstrate that strategies based on the illiquidity in the year prior to portfolio formation result in return characteristic of ostensibly contrarian strategies. Conclusions: These results suggest that the higher returns associated with contrarian investment strategies are the result of the higher illiquidity associated with value portfolios and represent compensation that the investor receives for accepting illiquidity. They also suggest that researchers should be cautious before attributing apparent anomalies to behavior-driven expectational errors rather than to other attributes unrelated to behavior, such as illiquidity.

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“…By and large, the empirical literature based on modern data supports this view. For example, Asparouhova et al (2010), Eleswarapu (1997) and Chalmers and Kadlec (1998) support the hypothesis of a positive risk premium for illiquidity; Baltagi et al (2006) and Hau (2006) illustrate that higher transaction costs come along with higher volatility.…”

Section: Introductionmentioning

confidence: 97%

Transaction Costs, Liquidity and Expected Returns at the Berlin Stock Exchange, 1892-1913

Victorovich

2010

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe estimate effective spreads and round-trip transaction costs at the Berlin Stock Exchange for the period 1892-1913 using daily stock market returns for a sample of 27 stocks. Our results show that transaction costs at the main stock exchange in a bank-based financial system at the turn of the 20 th century were quite low and about comparable to transaction costs in modern markets. Nonetheless, transaction costs varied substantially over time and across securities, whereby the cross-sectional variation could be substantially explained by firm size and time variation by crises. Furthermore, we find surprising evidence that transaction costs decrease the expected excess returns. Thereby size and momentum premia are of expected signs while market beta has no significant influence on the cross-sectional return variation.

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Cost of Transacting and Expected Returns in the Nasdaq Market

Cited by 144 publications

References 19 publications

Liquidity and Asset Prices

Liquidity and Asset Prices

Value investing or investing in illiquidity? The profitability of contrarian investment strategies, revisited

Transaction Costs, Liquidity and Expected Returns at the Berlin Stock Exchange, 1892-1913

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