A major issue in the literature on empirical market microstructure is the appropriate measure of liquidity. Microstructure theory suggests that the transitory cost plus the price impact of a trade is a good measure of an asset’s liquidity. Brennan and Subrahmanyam (1996) suggest using microstructure data to estimate these cost components, using the Glosten and Harris (1988) model. Sadka (2006) and Piqueira (2004) follow this approach and estimate the time series of monthly illiquidity for individual assets from quote and transaction data using the TAQ database for the period 1993–2001. These are probably the most accurate measures of time-varying individual asset liquidity available. Based on these estimates, Sadka (2006) shows that the price impact component, rather than the transitory cost component, is the priced liquidity risk factor.