A recent area of interest among both financial economists and market practitioners has been the measurement of liquidity and its impact on asset prices. Broadly speaking, liquidity is the ease with which a financial asset can be traded. Liquidity risk, on the other hand, can be defined in terms of the uncertainty associated with the measure of liquidity. Using the ILLIQ measure first proposed by Amihud (2002) as the basis, we provide empirical evidence in support of a more-refined version of this liquidity measure based on intra-day data. Our results strongly validate the notion that liquidity affects financial market performance, and, as a consequence, have implications for both portfolio construction and risk management. Our approach permits us to identify different liquidity regimes in financial markets by measuring the relation between aggregate market liquidity and the market’s pricing of liquidity risk. It hence has the potential to displace JEL Classification G 100 (General Financial Markets). We are grateful to Larry Pohlman and Wenjin Kang for helpful suggestions. We acknowledge, with thanks
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