This paper finds a significant positive relation between illiquidity and conditional variance of stock returns, both at the individual and aggregate levels. For each of the largest two hundred stocks on the NYSE and NASDAQ, we estimate a GARCH model in which share turnover and proportional...

We show that multifactor performance estimates for mutual funds suffer from systematic biases, and argue that these biases are a result of miscalculating the factor premiums. Because the factor proxies are based on hypothetical stock portfolios and do not incorporate transaction costs, trade...

This paper derives the optimal dynamic strategy for arbitrageurs with a finite horizon and non-myopic preferences facing a mean-reverting arbitrage opportunity (e.g. an equity pairs trade). We find that intertemporal hedging demands play an important role in determining how aggressively...