Abstract
Low infrequent trading implies low liquidity. Liquidity and transaction cost are two sides of the coin. Whether transaction cost is the determinant of stock liquidity premium? This paper selects common stocks of NYSE/Amex/Arca/ Nasdaq from 1926 to 2011 as research samples, makes a comprehensive analysis through Fama-French three factor model and Fama-French five factor model, LCAPM model and Pástor Stambaugh model. The results show that the ability of BA12, LOT12, CS12, and Cgibbs is limited, which means that transaction cost is not the determinant of liquidity premium, and the influence of transaction cost on the expected return of stock is indirect and secondary. The research provides a strong empirical experience for the asset pricing power of transaction cost is the second order. Thus, from the perspective of pricing meaning, transaction cost is not the decisive factor of price.
Highlights
Transaction cost is composed of direct transaction cost and implicit transaction cost (Demsetz, 1968), which is the comprehensive embodiment of market quality and an important factor of the core competitiveness of stock exchange
The results show that the ability of BA12, LOT12, CS12, and Cgibbs is limited, which means that transaction cost is not the determinant of liquidity premium, and the influence of transaction cost on the expected return of stock is indirect and secondary
Comparative analysis shows that BA12, LOT12, Cgibbs and CO-cost do not have the ability of expected return, and Cgibbs and CS12 are better than BA12, LOT12 and CO-cost
Summary
Transaction cost is composed of direct transaction cost and implicit transaction cost (Demsetz, 1968), which is the comprehensive embodiment of market quality and an important factor of the core competitiveness of stock exchange. Transaction cost analysis, transaction cost asset pricing power research is very important. On the meaning of asset pricing of transaction cost, Constantinides (1986) found that transaction cost affects asset demand, the impact on asset return is the second order, that is, when investors face large transaction cost, they can adjust it by reducing transaction frequency and volume. It’s worth noting that the large magnitude of portfolio return difference in the United States, Anthony and Tan (2011) found that the magnitude of liquidity premium and transaction cost spread is the first order, and transaction cost has asset pricing power. This paper takes the common stock of American stock market from June 1927 to December 2011 as the research sample to comprehensively explore the ability of transaction cost to predict stock returns.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
