Workshop Series: Kingsley Fong
Abstract: A growing literature uses percent cost or cost per volume liquidity proxies constructed from daily stock data to conduct research in international asset pricing, international corporate finance, and international market microstructure. Relatively little is known about how well these proxies are related to transactions costs in the global setting. We compare these proxies to actual transaction costs using the microstructure data in the Reuters Datascope Tick History dataset by the Securities Industry Research Centre of Asia-Pacific. Our sample contains 8.1 billion trades and 12.2 billion quotes representing 16,096 firms on 41 exchanges around the world from 1996 to 2007. We evaluate nine percent cost proxies (including two new ones) relative to four percent cost benchmarks: percent effective spread, percent quoted spread, percent realized spread, and percent price impact. We examine twelve cost per volume proxies (including two new ones) relative to a cost per volume benchmark: the slope of the price function "lambda." We test three dimensions: (1) higher average cross-sectional correlation with the benchmarks, (2) higher portfolio correlation with the benchmarks, or (3) lower prediction error relative to the benchmarks. We find that a new measure, FHT, is the best proxy for percent effective spread, percent quoted spread, and percent realized spread. We find that FHT is the best proxy for percent price impact, but is only moderately-well correlated with it and does not capture the correct scale. We find that LOT Mixed Impact, Zeros Impact, and Zeros2 Impact are the best proxies for lambda, but they are only moderately-well correlated with it and do not capture the correct scale.
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Kingsley YL Fong is senior lecturer at the Australian School of Business - Banking and Finance. His research focuses on market microstructure, aspects of liquidity, investment funds' performance evaluation, institutional and individual investor trading. He publishes in the Journal of Banking and Finance, Pacific Basin Finance Journal, International Review of Finance, Accounting and Finance, and the Australian Journal of Management. He has been award the degree of B.Com (1st Class Hon) UNSW and PhD (Finance) USYD. He has been a CFA charter holder since 2001.