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Market Frictions, Price Delay, and the Cross-Section of Expected Returns

42 Pages Posted: 27 May 2003  

Kewei Hou

Ohio State University (OSU) - Department of Finance

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Date Written: April 2003

Abstract

We parsimoniously characterize the severity of market frictions affecting a stock using the delay with which its share price responds to information. The most severely delayed firms command a large return premium that captures the size effect and half the value premium. Moreover, idiosyncratic risk is priced only among the most delayed firms. These results are not explained by other sources of return premia, microstructure, or pure liquidity effects, but appear most consistent with investor recognition and firm neglect. The very small segment of neglected firms (less than 0.02% of the market) captures a sizeable amount of cross-sectional variation in average returns.

Suggested Citation

Hou, Kewei and Moskowitz, Tobias J., Market Frictions, Price Delay, and the Cross-Section of Expected Returns (April 2003). CRSP Working Paper No. 547. Available at SSRN: https://ssrn.com/abstract=408161 or http://dx.doi.org/10.2139/ssrn.408161

Kewei Hou (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Tobias J. Moskowitz

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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