Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio

Abstract

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.

Price impact of block trades in the Saudi stock market

“…We also witness that larger companies tend to be less risky and are traded more frequently due to greater levels of liquidity. This is in agreement with market microstructure theory (see among others Florackis et al, 2011). Table 7 presents the estimated parameters from the regression for the entire sample (4,221,870 block transactions).…”

Higher co-moments and asset pricing on London Stock Exchange

“…Following conventional practice in UK market studies (see e.g. Fletcher and Kihanda, 2005;Florackis et al, 2011), we further exclude unit trusts, investment trusts and ADRs. We end up with a final sample of 3501 shares.…”

Google search volume and its influence on liquidity and returns of German stocks

“…This measure is proposed by Florackis et al (2010) and captures the price impact of the stock turnover rate. As shown by (7), TPI iyd is estimated by dividing the absolute return |R iyd | of stock i on day d of year y by the respective stock turnover rate TO iyd .…”