An extension analysis of Amihud's illiquidity premium: Evidence from the Taiwan stock market

Abstract

This study proposes a novel illiquidity measure that excludes overnight returns and incorporates the recency effect, and investigates whether this new metric more effectively captures the illiquidity premium in the Taiwan stock market relative to Amihud's (2002) measure and other illiquidity measures that exclude overnight returns or account for the recency effect. Cross-sectional and time-series asset pricing tests reveal that our measure dominates other illiquidity measures, yielding a more profitable long–short strategy. Vector autoregressive analysis confirms these results for the aggregate market. Our study contributes to the measurement of liquidity in emerging markets and suggests potential improvements for portfolio management and asset pricing models.