Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio

Gregoriou, Andros; Florackis, Chris; Kostakis, Alexandros

Abstract

This study proposes a new price impact ratio as an alternative to the widely used Amihud's (2002) Return-to-Volume ratio. We demonstrate that the new price impact ratio, which is deemed Return-to-Turnover ratio, has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991-2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks' cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock returns by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation. © 2011 Elsevier B.V.

Citation

Gregoriou, A., Florackis, C., & Kostakis, A. (2011). Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio. Journal of Banking and Finance, 35(12), 3335-3350. https://doi.org/10.1016/j.jbankfin.2011.05.014

• Journal Article Type: Article
• Acceptance Date: May 16, 2011
• Online Publication Date: May 20, 2011
• Publication Date: Dec 1, 2011
• Deposit Date: Nov 13, 2014
• Journal: Journal Of Banking & Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 35
• Issue: 12
• Pages: 3335-3350
• DOI: https://doi.org/10.1016/j.jbankfin.2011.05.014
• Keywords: Economics and Econometrics; Finance
• Public URL: https://hull-repository.worktribe.com/output/465667
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0378426611001750?via%3Dihub