Sell-side Illiquidity and the Cross-Section of Expected Stock Returns

Abstract

The demand for immediacy is likely to be stronger for sellers of securities than for buyers since investors are more likely to have a pressing need to raise cash than to exchange cash for securities. Secondly, previous literature suggests that market makers will react asymmetrically to orders for the purchase and sale of securities. We estimate separate buy- and sell-side price impact measures for a large cross-section of stocks over more than 20 years, and find pervasive evidence that sell-side illiquidity exceeds buy-side illiquidity. Thus, the time-series of the value weighted average difference between buy- and sell-side illiquidity is overwhelmingly positive over our sample period. Further, both illiquidity measures co-move significantly with the TED spread, a measure of funding liquidity. In the cross-section, sell-side illiquidity is priced far more strongly than buy-side illiquidity. Indeed, our evidence indicates that the illiquidity premium in asset returns emanates almost entirely from the sell side.