“Can Global Stock Liquidity Be Measured?” by Kingsley Fong
University of New South Wales
Charles A. Trzcinka
Craig W. Holden
A rapidly growing literature uses bid-ask spread proxies or price impact proxies constructed from daily stock data to conduct research in international asset pricing, international corporate finance, and international market microstructure. Despite the widespread use of various spread proxies and various price impact proxies in international research, relatively little is known about how well these proxies are related to actual transactions costs in the global setting. We compare these proxies to actual transaction costs using the TACTIC dataset by the Securities Industry Research Centre of Asia-Pacific (SIRCA), which contains more than a decade of global intraday Reuters data. Our sample contains 8.1 billion trades and 12.2 billion quotes representing 16,096 firms on 41 exchanges around the world from 1996 to 2007. We evaluate the performance of nine spread proxies (including two new ones that we introduce) relative to three spread benchmarks: percent effective spread, percent quoted spread, and percent realized spread. We evaluate the performance of twelve price impact proxies (including two new ones that we introduce) relative to two price impact benchmarks: the slope of the price function "lambda" and permanent price impact. In each case, we test three performance dimensions: (1) higher average cross-sectional correlation with the benchmarks, (2) higher portfolio correlation with the benchmarks, or (3) lower prediction error relative to the benchmarks. We find that a new measure that we introduce, FHT, is the best proxy for percent effective spread, percent quoted spread, and percent realized spread. We find that none of the price impact proxies does a good job of capturing Lambda. We find that the proxies, Amihud and FHT Impact, are moderately-well correlated with Permanent Price Impact, but do not capture the correct scale.