Price Impact Reversal and the Illiquidity Premium

54 Pages Posted: 11 Mar 2020 Last revised: 4 May 2021

See all articles by Jeffrey A. Busse

Jeffrey A. Busse

Emory University - Department of Finance

Yanbin Wu

Emory University - Goizueta Business School

Date Written: March 11, 2020

Abstract

We find that a small subset of stocks with poor returns drives the illiquidity premium, consistent with it representing a return reversal. Stock transactions show that institutional investors sell illiquid losers, and that these stocks are subject to large transaction costs. The positive abnormal return associated with illiquid stocks stems directly from the reversal of the group of stocks with poor recent returns and downward price pressure. Our results suggest that these abnormal returns do not represent a broad premium that compensates investors for holding illiquid stocks. In fact, the mirror image group of illiquid winners shows an illiquidity discount.

Keywords: Illiquidity Premium, Return Reversals, Price Pressure

JEL Classification: G12, G15

Suggested Citation

Busse, Jeffrey A. and Wu, Yanbin, Price Impact Reversal and the Illiquidity Premium (March 11, 2020). Available at SSRN: https://ssrn.com/abstract=3552969 or http://dx.doi.org/10.2139/ssrn.3552969

Jeffrey A. Busse

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-0160 (Phone)
404-727-5238 (Fax)

Yanbin Wu (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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