Liquidity and autocorrelations in individual stock returns

Doron Avramov*, Tarun Chordia, Amit Goyal

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

235 Scopus citations

Abstract

This paper documents a strong relationship between short-run reversals and stock illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in high turnover, low liquidity stocks, as the price pressures caused by non-informational demands for immediacy are accommodated. However, the contrarian trading strategy profits are smaller than the likely transactions 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.

Original languageAmerican English
Pages (from-to)2365-2394
Number of pages30
JournalJournal of Finance
Volume61
Issue number5
DOIs
StatePublished - Oct 2006
Externally publishedYes

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