Liquidity Shocks and Stock Market Reactions

108 Pages Posted: 15 Mar 2012 Last revised: 26 Aug 2013

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Yannan Shen

CUNY Baruch College; Bentley University

Yi Tang

Fordham University - Gabelli School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: August 23, 2013

Abstract

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.

Keywords: Stock returns, liquidity shocks, stock market reactions, underreaction, investor attention

JEL Classification: G02, G10, G11, G12, G14, C13

Suggested Citation

Bali, Turan G. and Peng, Lin and Shen, Yannan and Shen, Yannan and Tang, Yi, Liquidity Shocks and Stock Market Reactions (August 23, 2013). Available at SSRN: https://ssrn.com/abstract=2021609 or http://dx.doi.org/10.2139/ssrn.2021609

Turan G. Bali

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Lin Peng (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Yannan Shen

CUNY Baruch College ( email )

55 Lexington Ave 12-291
New York, NY 10010
United States
646-312-3242 (Phone)
646-312-3161 (Fax)

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States
781-891-2652 (Phone)

HOME PAGE: http://https://faculty.bentley.edu/details.asp?uname=yshen1

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
147
Abstract Views
1,646
rank
14,341
PlumX Metrics