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Liquidity and Autocorrelations in Individual Stock Returns
Author(s) -
AVRAMOV DORON,
CHORDIA TARUN,
GOYAL AMIT
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.01060.x
Subject(s) - contrarian , immediacy , market liquidity , profitability index , economics , monetary economics , stock (firearms) , financial economics , trading strategy , business , finance , mechanical engineering , philosophy , epistemology , engineering
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.