Trading Frictions Over the Long Run
April 28, 2010 - Big Ideas, Equity Premium
Careful assessment of the exploitability of premiums or anomalies derived from long-run series such as stock indexes requires consideration of contemporaneous trading frictions. How have frictions changed over time? In the May 2002 version of his paper entitled “A Century of Stock Market Liquidity and Trading Costs”, Charles Jones assembles annual long-run series of three components of aggregate liquidity: (1) proportional bid-ask spreads for large-capitalization NYSE stocks (1900-2000); (2) proportional commissions for NYSE stocks (1925-2000); and, (3) turnover for NYSE stocks (1900-2000). He applies these series to explore the relationship between stock market returns and aggregate liquidity over time. Using a range of sources to calculate bid-ask spreads for the Dow Jones/DJIA stocks and commission, volume and return data for a broader sample of NYSE stocks, he finds that: Keep Reading