Liquidity and Autocorrelations in Individual Stock Returns

41 Pages Posted: 13 Jun 2004  

Doron Avramov

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Tarun Chordia

Emory University - Department of Finance

Amit Goyal

University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Multiple version iconThere are 2 versions of this paper

Date Written: January 12, 2005

Abstract

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

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

Doron Avramov (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~davramov/

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Amit Goyal

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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