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Systematic liquidity risk and stock price reaction to shocks

Mazouz, Khelifa, Alrabadi, Dima W. H. and Yin, Shuxing 2012. Systematic liquidity risk and stock price reaction to shocks. Accounting & Finance 52 (2) , pp. 467-493. 10.1111/j.1467-629X.2011.00403.x

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Abstract

This study examines the relationship between systematic liquidity risk and stock price reaction to large 1-day price changes (or shocks). We base our analysis on a yearly updated constituents list of the FTSE All share index. Our overall results are consistent with the price continuation hypothesis, which suggests that positive (negative) shocks will be followed by positive (negative) abnormal returns. However, further analysis indicates that stocks with low systematic liquidity risk react efficiently to both positive and negative shocks, whereas stocks with high systematic liquidity risk underreact to both positive and negative shocks. Our results are valid irrespective of various robustness tests such as size of the shock, size of the firm, month-of-the-year and day-of-the-week effects. We conclude that trading on price patterns following shocks may not be profitable, as it involves taking substantial liquidity exposure.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Uncontrolled Keywords: Shocks; Systematic liquidity risk; Market efficiency; Underreaction
Publisher: Wiley-Blackwell
ISSN: 1467-629X
Last Modified: 04 Jun 2017 06:07
URI: http://orca.cf.ac.uk/id/eprint/56679

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