What Are the Best Liquidity Proxies for Global Research

Abstract

review of finance, 2017, 1355–1401 doi: 10.1093/rof/rfx003 advance access publication date: 13 march 2017 what are the best liquidity proxies for global research?* kingsley y. l. fong1, craig w. holden2, and charles a. trzcinka2 1university of new south wales business school and 2indiana university abstract liquidity plays an important role in global research. we identify high-quality liquidity proxies based on low-frequency (daily) data, which provide 1,000(cid:2) to 10,000(cid:2) computational savings compared to computing high-frequency (intraday) liquidity measures. we find that: (i) closing percent quoted spread is the best monthly percent-cost proxy when available, (ii) amihud, closing percent quoted spread impact, lot mixed impact, high–low impact, and fht impact are tied as the best monthly cost-per-dollar-volume proxy, (iii) the daily version of closing percent quoted spread is the best daily percent-cost proxy, and (iv) the daily version of amihud is the best daily cost-per-dollar-volume proxy. jel classification: c15, g12, g20 keywords: liquidity, transaction costs, effective spread, price impact received march 16, 2015; accepted january 1, 2017 by editor burton hollifield. 1. introduction rapidly expanding global research analyzes the connection between monthly market liquidity and global asset pricing,1 global corporate finance,2 and global market microstructure.3 * we thank seminar participants at the china international conference in finance, hong kong …

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