The Cost of Liquidity: Results from a Natural Experiment

Eugene Kandel, Isabel Tkatch

Research output: Working paper/preprintPreprint


Tel Aviv Stock Exchange is the only market open on Sundays and trades ETNs on local and US indices. We use this feature to estimate the causal relation between the inventory cost and the bid-ask spread. We compare spreads on the most liquid indices on Sundays and other days using differences-in-differences approach to estimate the inventory component of the spread without making structural assumptions. We show that on Sundays the bid ask spread in the US ETNs more than doubles relative to the rest of the week, indicating that inventory cost is an economically significant transaction cost. The same effect is found during the weekday morning hours when the Israeli market is open, but the European markets are still closed - the inventory component can reach as high as 80% of the spread during some time intervals. No such effects are observed in the Israeli indices.
Original languageAmerican English
Number of pages26
StatePublished - 2009


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