COST OF TRANSACTING AND EXPECTED RETURNS IN THE NASDAQ MARKET

This article empirically examines the liquidity premium predicted by t he Amihud and Mendelson (1986) model using Nasdaq data over the 1973-1 990 period. The results support the model and are much stronger than f or the New York Stock Exchange (NYSE), as reported by Chen and Kan (19 89) and Eleswarapu and Reinganum (1993). I conjecture that the stronge r 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 th e quoted spreads on the NYSE, since the Nasdaq dealers do not face com petition from limit orders or floor traders.