| his dissertation contributes two essays to the intersection of market microstructure and asset pricing. In the first essay, I use a novel liquidity and asymmetric information proxy, named full-information transaction cost or FITC, to study the pricing of aggregate illiquidity and idiosyncratic market frictions. FITCs are designed to measure (the standard deviations of) the difference between observed high-frequency transaction prices and underlying, unobserved full-information prices. Using the 25 Fama and French research portfolios and the value-weighted FITC factor, I find that liquidity risk is priced. Specifically, I find that the more negative is the exposure of the portfolio to market illiquidity, the greater is the required return. Using individual stocks, I find that a FITC of 10 basis points (corresponding to the average value in my sample) is associated with a statistically significant yearly premium of about 2.5%. Results are robust to the use of a variety of systematic factors. They are also robust to the use of idiosyncratic volatility as a control.;In the second essay, I show that there is a significant premium associated with a price level characteristic. Cheaper stocks receive a positive premium. The difference in the estimated yearly premium between a... |
