41 Pages Posted: 13 Jun 2004
Date Written: January 12, 2005
This paper documents a strong relationship between short-run reversals and stock return illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in the high turnover, low liquidity stocks, as the price pressures caused by non-informational demands for immediacy are accommodated. Thus, the high frequency negative autocorrelations are more likely to result from stresses in the market for liquidity. The contrarian trading strategy profits are smaller than the likely transactions costs because the high turnover, low liquidity stocks face large transaction and market impact costs. This lack of profitability and the fact that the overall findings are consistent with rational equilibrium paradigms suggest that the violation of the efficient market hypothesis due to short-term reversals is not so egregious after all.
Suggested Citation: Suggested Citation
Avramov, Doron and Chordia, Tarun and Goyal, Amit, Liquidity and Autocorrelations in Individual Stock Returns (January 12, 2005). Available at SSRN: https://ssrn.com/abstract=555968 or http://dx.doi.org/10.2139/ssrn.555968
By Andrew Ang