Federico M. Bandi, Jeffrey R. Russell, Omid Sabbaghi* (University of Chicago)

Abstract

We use the measure of liquidity and asymmetric information "full-information transaction cost" or FITC (Bandi and Russell 2004) to study the effects of idiosyncratic market frictions on cross sectional asset prices. FITCs are designed to measure the difference between observed high-frequency transaction prices and underlying, unobserved full-information prices. FITCs have been shown to be more highly correlated with classical liquidity and asymmetric information proxies (number of trades, volume traded, number of analysts following the stock, and PIN, for example) than traditional transaction cost measures (such as effective spreads and quoted spreads). We find that the average FITC value in our sample is associated with a statistically significant yearly premium of about 0.25%. Our results are robust to a variety of systematic and idiosyncratic factors.