A quarterly time series of the aggregate commission rate for NYSE trading over
1980–2003 allowed an investigation of the information conveyed by this
liquidity risk metric and analysis of its critical role in the generation of
stock returns. The aggregate commission rate was found to be highly correlated
with other illiquidity metrics, such as the bid–ask spread. The rate is
significantly and positively related to the excess returns of the stock market
portfolio and has significant explanatory power for the cross-sectional
variation in stock returns. An analysis of size-based portfolios indicates that
returns become more sensitive to the aggregate commission rate with declining
market capitalization.