New Directions in Economics

Professor Oliver Linton has published a new Janeway Institute Working Paper with L. Wang and C.M. Hafner.

They introduce a new class of semiparametric dynamic autoregressive models for the Amihud illiquidity measure, which captures both the long-run trend in the illiquidity series with a nonparametric component and the short-run dynamics with an autoregressive component. 

They develop a GMM estimator based on conditional moment restrictions and an efficient semiparametric ML estimator based on an iid assumption. They derive large sample properties for both estimators and further develop a methodology to detect the occurrence of permanent and transitory breaks in the illiquidity process.

Finally, they demonstrate the model performance and its empirical relevance on two applications. First, they study the impact of stock splits on the illiquidity dynamics of the five largest US technology company stocks. Second, they investigate how the different components of the illiquidity process obtained from their model relate to the stock market risk premium using data on the S&P 500 stock market index.