The Korean Economic Review
Liquidity as Price Effect on Time to Sale
Keunkwan Ryu (Seoul National University) and Hyun-Yeol Shin (Bank of Korea)Year 2010Vol. 26No. 2
This paper proposes a new empirical measure of liquidity, termed“liquidity delta.” An asset is considered liquid if it can be traded quickly, inlarge quantities at low cost with little impact on market price. Trade-offbetween asking price and sale intensity, is one of the most commoncharacteristics of assets. The new measure, liquidity delta, empiricallycaptures this trade-off. We estimate liquidity delta for sixty major stockslisted on the Korea Stock Exchange. We demonstrate that liquidity delta is auseful measure of liquidity, with liquidity level and its variability showingnegative and positive relation, respectively, with the asset's rate of return.The negative relationship shows premium for lack of liquidity whereas thepositive one shows premium for liquidity risk.