Liquidity shocks and stock market reactions

• Autores: Turan G. Bali, Lin Peng, Yannan Shen, Yi Tang
• Localización: Review of Financial Studies, ISSN-e 1465-7368, Vol. 27, Nº. 5, 2014, págs. 1434-1485
• Idioma: inglés
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• Resumen

  • We find that the stock market underreacts to stock-level liquidity shocks: liquidity shocks are not only positively associated with contemporaneous returns, but they also predict future return continuations for up to six months. Long-short portfolios sorted on liquidity shocks generate significant returns of 0.70% to 1.20% per month that are robust across alternative shock measures and after controlling for risk factors and stock characteristics. Furthermore, we show that investor inattention and illiquidity contribute to the underreaction: while both are significant in explaining short-term return predictability of liquidity shocks, the inattention-based mechanism is more powerful for the longer-term return predictability.