Price Impact Reversal and the Illiquidity Premium

41 Pages Posted: 11 Mar 2020 Last revised: 7 Aug 2020

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 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

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
60
Abstract Views
382
rank
398,952
PlumX Metrics