The maximum bid-ask spread

Abstract We examine the return premium associated with a new measure of illiquidity that focuses on extreme points in the distribution of bid-ask spreads. Results show that stocks with larger maximum bid-ask spreads and price impacts command a return premium that is both statistically and economically significant. These results are robust to a series of multifactor portfolio tests and cross-sectional regressions controlling for mean spreads and other observable liquidity metrics. These findings suggest that the distribution of spreads matters when identifying illiquidity return premia due to the multi-faceted nature of liquidity.