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Cost of Transacting and Expected Returns in the Nasdaq Market



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    • University of Auckland, Auckland, New Zealand. I thank two anonymous referees, Yakov Amihud, Henk Berkman, Jerry Bowman, J. B. Chay, Usha Eleswarapu, Phil Shane, and Lorne Switzer for their comments and suggestions. This project was initiated while I was at the University of Iowa.


This article empirically examines the liquidity premium predicted by the Amihud and Mendelson (1986) model using Nasdaq data over the 1973–1990 period. The results support the model and are much stronger than for the New York Stock Exchange (NYSE), as reported by Chen and Kan (1989) and Eleswarapu and Reinganum (1993). I conjecture that the stronger evidence on the Nasdaq is due to the dealers' inside spreads on the Nasdaq being a better proxy for the actual cost of transacting than the quoted spreads on the NYSE, since the Nasdaq dealers do not face competition from limit orders or floor traders.

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