Illiquidity and Stock Returns II: Cross-Section and Time-Series Effects

Review of Financial Studies, forthcoming

31 Pages Posted: 19 Mar 2018 Last revised: 25 Jun 2020

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Joonki Noh

Case Western Reserve University - Department of Banking and Finance

Date Written: March 12, 2018

Abstract

Lou and Shu decompose Amihud’s illiquidity measure (ILLIQ) proposing that its component, the average of inverse dollar trading volume (IDVOL), is sufficient to explain the pricing of illiquidity. Their decomposition misses a component of ILLIQ that is related to illiquidity. We find that this component affects stock returns significantly, both in the cross-section and in time-series. We show that the ILLIQ premium is significantly positive after controlling for mispricing, sentiment, and seasonality. In addition, the aggregate market ILLIQ outperforms market IDVOL in estimating the effect of market illiquidity shocks on realized stock returns.

Keywords: Illiquidity, Stock Returns, Cross-Section, Time-Series, Trading Volume

JEL Classification: G11, G12

Suggested Citation

Amihud, Yakov and Noh, Joonki, Illiquidity and Stock Returns II: Cross-Section and Time-Series Effects (March 12, 2018). Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3139180 or http://dx.doi.org/10.2139/ssrn.3139180

Yakov Amihud

New York University - Stern School of Business ( email )

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Joonki Noh (Contact Author)

Case Western Reserve University - Department of Banking and Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3737 (Phone)

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