46 Pages Posted: 9 Sep 2003
This paper investigates the components of liquidity risk that are important for asset-pricing anomalies. Firm-level liquidity is decomposed into variable and fixed price effects and estimated using intraday data for the period 1983-2001. Unexpected systematic (market-wide) variations of the variable component rather than the fixed component of liquidity are shown to be priced within the context of momentum and post-earnings-announcement drift (PEAD) portfolio returns. As the variable component is typically associated with private information (e.g., Kyle (1985)), the results suggest that a substantial part of momentum and PEAD returns can be viewed as compensation for the unexpected variations in the aggregate ratio of informed traders to noise traders.
Keywords: Liquidity risk, Transaction costs, Price impact, Asset pricing, Momentum trading
JEL Classification: G12, G14, D82
Suggested Citation: Suggested Citation
Sadka, Ronnie, Momentum and Post-Earnings-Announcement Drift Anomalies: The Role of Liquidity Risk. Journal of Financial Economics, Forthcoming; EFA 2004 Maastricht Meetings Paper No. 5290. Available at SSRN: https://ssrn.com/abstract=428160 or http://dx.doi.org/10.2139/ssrn.428160