Sell-Side Liquidity And The Cross-Section Of Expected Stock Returns

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Executive Summary

There is reason to believe that market makers may react asymmetrically to purchases and sales on account of their tendency to hold positive inventories. The paper estimates separate buy- and sell-side price impact measures for a large cross-section of stocks over more than 20 years. The paper finds pervasive evidence that sell-side illiquidity exceeds buy-side illiquidity. Both illiquidity measures co-move significantly with the TED spread, which is a measure of funding illiquidity. Previous studies of the effect of liquidity on asset pricing have used measures of liquidity that assume that trading costs are symmetric for purchases and sales.

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