Sell-Side Liquidity and the Cross-Section of Expected Stock Returns

Abstract

Following the recent financial crisis, a number of commentators have suggested that liquidity disappears in falling markets. It is when investors try to convert assets to cash that a lack of liquidity is felt most acutely. In other words, investor sales receive lower liquidity than investor buys. In this paper, we will attempt to verify whether this is indeed true. Since this will be an asset pricing study that will examine the effect of price impact measures on asset returns, we will need to obtain sufficient data, given that a long time series is needed to measure the first moment of returns accurately. In order to compute the price impact measures of investor sales and purchases we will examine transactions data. Transactions data is limited to the ISSM and the TAQ data series and begins in 1983. There are no publicly available datasets that provide data prior to 1983. We will examine every transaction on the NYSE from 1983 onwards in order to compute price impact measures for investor sales and purchases.