Illiquidity Shocks: U.S. and International Evidence

51 Pages Posted: 20 Oct 2017 Last revised: 25 Jul 2022

See all articles by Te-Feng Chen

Te-Feng Chen

Hong Kong Polytechnic University

Tarun Chordia

Emory University - Department of Finance

K.C. John Wei

Hong Kong Polytechnic University

Date Written: July 2022

Abstract

We examine the return impact of illiquidity shocks. Consistent with an illiquidity spiral, positive shocks are followed by persistent negative returns and increased illiquidity. The illiquidity spiral dissipates because of the illiquidity premium driven increase in expected returns. The positive illiquidity shock is followed by a negative cash flow component of returns that is initially larger (in absolute terms) than the positive discount rate component, which becomes larger in later periods consistent with the increase in expected returns. The impact of illiquidity shocks on returns in global and developed markets (excluding the US) is similar to that in the U.S.

Keywords: Illiquidity shocks; Continuation; Reversal; Market Crash

JEL Classification: G11; G12; G14; G15; G41

Suggested Citation

Chen, Te-Feng and Chordia, Tarun and Wei, Kuo-Chiang (John), Illiquidity Shocks: U.S. and International Evidence (July 2022). Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=3056151 or http://dx.doi.org/10.2139/ssrn.3056151

Te-Feng Chen

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong
+852 3400 3856 (Phone)

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Kuo-Chiang (John) Wei (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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