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A Century of Stock Market Liquidity and Trading Costs
Open accessAbstract
I assemble and examine an annual time series of bid–ask spreads on Dow Jones stocks from 1900 to 2000 and average commission rates for trading NYSE stocks since 1925. Spreads are cyclical, especially during periods of market turmoil. The sum of half‐spreads and one‐way commissions, multiplied by annual turnover, estimates the aggregate cost of trading and drives a wedge between gross and net equity returns. This difference explains only a small part of the observed equity premium, though I show that the gross equity premium is perhaps 1% lower today than it was early in the 1900's. Finally, I find that the transaction cost measures (spreads and turnover), which serve as a proxy for liquidity, predict stock returns 1 year or more ahead and dominate traditional measures such as the dividend yield. The evidence suggests aggregate liquidity is a determinant of expected stock market returns.
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Cites
Common risk factors in the returns on stocks and bonds
Fama, E. F., & French, K. R. (1993) · Journal of Financial Economics · doi:10.1016/0304-405x(93)90023-5 · Cited by 25,754
Odean, T. (1999) · American Economic Review · doi:10.1257/aer.89.5.1279 · Cited by 2,247
Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement
Hodrick, R. J. (1992) · Review of Financial Studies · doi:10.1093/rfs/5.3.351 · Cited by 1,523
Cited by
Investor Sentiment and the Cross‐Section of Stock Returns
BAKER, M., & WURGLER, J. (2006) · The Journal of Finance · doi:10.1111/j.1540-6261.2006.00885.x · Cited by 6,049
Asset pricing with liquidity risk
ACHARYA, V, & PEDERSEN, L. (2005) · Journal of Financial Economics · doi:10.1016/j.jfineco.2004.06.007 · Cited by 2,773
Amihud, Y., Mendelson, H., & Pedersen, L. H. (2005) · Foundations and Trends® in Finance · doi:10.1561/0500000003 · Cited by 820
The illusory nature of momentum profits
Lesmond, D. A., Schill, M. J., & Zhou, C. (2004) · Journal of Financial Economics · doi:10.1016/s0304-405x(03)00206-x · Cited by 657
Testing Asymmetric-Information Asset Pricing Models
Kelly, B., & Ljungqvist, A. (2012) · Review of Financial Studies · doi:10.1093/rfs/hhr134 · Cited by 580
Metadata
- Authors
- Jones, C. M.
- Venue
- SSRN Electronic Journal
- Publisher
- Elsevier BV
- Published
- 2002
- ISSN
- 1556-5068 (ISSN-L)
- OpenAlex
- W1825609847
- Cited by
- 461
- References
- 3
- Type
- posted content
- Language
- en
- Open access
- green
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