Abstract
A new measure of illiquidity is proposed in this study and its pricing implication is tested for the four Nordic markets. To measure illiquidity we average across all stocks, a monthly frequency of those days, when the incidences of zero return and of no change in $/local exchange rate occur simultaneously. The advantages of estimating market-wide illiquidity in this manner are twofold. First, in comparison with other measures of illiquidity commonly proposed in the literature, this approach yields the maximum return spread between the most illiquid and liquid stocks. Second, this method establishes a link between returns and market-wide illiquidity risk, which is not found, when either illiquidity risk is estimated using other measures of illiquidity or when the market model is used.
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