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Capital gains, illiquidity, and stock returns

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  • Lei, Xiaoyan
  • Zhou, Yuegang
  • Zhu, Xiaoneng

Abstract

This paper investigates the tripartite association among capital gains, illiquidity, and stock market returns. We find that trading in capital gains improves stock liquidity. We also find that realized stock returns are negatively related to the joint term of illiquidity and capital gains, but positively correlated with capital gains. These results are largely robust when we distinguish stock liquidity from unexpected liquidity. Our findings are consistent with the disposition effect and have important implications for asset pricing models and for investing.

Suggested Citation

  • Lei, Xiaoyan & Zhou, Yuegang & Zhu, Xiaoneng, 2013. "Capital gains, illiquidity, and stock returns," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 273-293.
    • Handle: RePEc:eee:pacfin:v:25:y:2013:i:c:p:273-293
    DOI: 10.1016/j.pacfin.2013.10.001
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    Cited by:

    1. Lei, Xiaoyan & Zhou, Yuegang & Zhu, Xiaoneng, 2014. "Capital gains and trading," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 167-183.
    2. Tomislav Globan & Tihana Skrinjaric, 2020. "Penny wise and pound foolish: capital gains tax and trading volume on the Zagreb Stock Exchange," Public Sector Economics, Institute of Public Finance, vol. 44(3), pages 299-329.

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    More about this item

    Keywords

    Illiquidity; The disposition effect; Capital gains; Stock return;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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