In this study we propose a new price impact ratio as an alternative to the widely used Amihud's (2002) Return-to-Volume ratio (RtoV). This new measure, which is deemed Return-to-Turnover ratio (RtoTR), essentially modifies RtoV by substituting trading volume in its denominator with the turnover ratio for each security. We demonstrate that the new price impact ratio has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991-2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks' cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock prices by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.
JEL classification: G10; G12; G14
Trading Frequency and Asset Pricing on the London Stock Exchange:Evidence from a New Price Impact Ratio
AbstractIn this study we propose a new price impact ratio as an alternative to the widely used Amihud's (2002) Return-to-Volume ratio (RtoV). This new measure, which is deemed Return-to-Turnover ratio (RtoTR), essentially modifies RtoV by substituting trading volume in its denominator with the turnover ratio for each security. We demonstrate that the new price impact ratio has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991-2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks' cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock prices by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.
This study examines stock return predictability via lagged …nancial variables with unknown stochastic properties. We propose a novel testing procedure that (1) robusti…es inference to regressors' degree of persistence, (2) accommodates testing the joint predictive ability of …nancial variables in multiple regression, (3) is easy to implement as it is based on a linear estimation procedure, and (4) can be used for long-horizon predictability tests. We provide some evidence in favor of short-horizon predictability during the 1927-2012 period. Nevertheless, this evidence almost entirely disappears in the post-1952 period. Moreover, predictability becomes weaker, not stronger, as the predictive horizon increases.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.