Price Impact Reversal and the Illiquidity Premium
41 Pages Posted: 11 Mar 2020 Last revised: 7 Aug 2020
Date Written: March 11, 2020
We find that the illiquidity premium exists only among stocks with relatively poor prior month returns, consistent with it representing a return reversal. Mutual fund portfolio holdings and institutional stock trades indicate that institutional investors predominantly sell illiquid-loser stocks. Among illiquid-losers, stocks that institutional investors sell show significantly greater transaction costs and future returns than stocks that institutional investors buy, suggesting that a price rebound following negative price pressure contributes to the outperformance of illiquid stocks. Our results highlight the close correspondence between the illiquidity premium and return reversals stemming from institutional selling pressure.
Keywords: Illiquidity Premium, Return Reversals, Price Pressure
JEL Classification: G12, G15
Suggested Citation: Suggested Citation