- CoxandPetersen(1994)examinedU.S.stocksthat
hadone-daypricedeclinesofmorethan 10 percent
andthesubsequentpricereversalthedayafter.They
concluded that a large component of the reversal
couldbeexplainedbythebid-askspreadandthatthe
price reversal could therefore be viewed as
compensation for illiquidity.
41 Avramov,Chordia,andGoyal(2005)alsofinda
strongrelationshipbetweenshortrunpricereversals
and illiquidity.
42 Thelargestpricereversalsareinthemostilliquid
stocks, which would also indicate that contrarian
investmentstrategies,whichtrytotakeadvantageof
these price reversals, will be saddled with higher
transactions costs. - Temporalanomaliessuchastheweekendeffectand
theJanuary effectaremost pronouncedforilliquid
stocks.EleswarapuandReinganum(1993)notethat
stocks with lowliquidity and high bid-ask spreads
earn most of their excess returns in January.
43 Thehightransactionscostsassociatedwithtrading
on these stocks may explain why these anomalies
continue to have the staying power that they do. - EllulandPagano(2002)relatedtheunderpricingof
337 Britishinitialpublicofferingstotheilliquidityof
theissuesaftertheofferings,andfoundevidencethat
thelessliquidsharesareexpectedtobeandtheless
predictable the liquidity, the greater the underpricing.
44 - While itwould befoolhardy toattribute allof the
well documented excess returns
45 that have been associated with owning small
marketcapitalizationandlowprice-to-bookstocksto
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