Trade-Time Measures of Liquidity

Traditional measures of stock liquidity have become noisier following dramatic changes in liquidity provision post decimalization. We develop stock-specific liquidity measures that control for short-term variations in liquidity supply and trading activity. Our trade-time based measures capture per-dollar price impacts of fixed-dollar positions. Our measures outperform standard measures including bid-ask spreads, effective spreads, estimates of Kyle's λ, and Amihud's (2002) measure, especially in recent years. Post-decimalization, expected trading costs still explain the cross-section of expected returns for NYSE-listed stocks: we obtain monthly liquidity premium estimates of 5.3bp for expected returns and 2.4bp for risk-adjusted returns. Moreover, estimated liquidity premia rise after the implementation of Reg-NMS.