Liquidity premium and the Corwin-Schultz bid-ask spread estimate

What is it about?

The purpose of this paper is to explore the price implication of a newly developed estimator of the bid-ask spread by Corwin and Schultz (2012). The paper focusses on whether the new measure as a liquidity proxy commands a significant premium. The research helps the understanding on the validity of the Corwin-Schultz estimate as a liquidity measure.

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Why is it important?

This paper, for the first time, provides a thorough assessment of the Corwin-Schultz spread estimate as a liquidity proxy, which distinguish from Corwin and Schultz (2012) who focus on whether their spread estimate measures transaction costs. Our study not only helps practitioners and academic researchers to select an adequate liquidity measure and an asset pricing model to use, but it also sheds light on the current debate about whether transaction costs have the first order importance in asset pricing.