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Liquidity and Autocorrelations in Individual Stock Returns

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  • DORON AVRAMOV
  • TARUN CHORDIA
  • AMIT GOYAL

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. Copyright 2006 by The American Finance Association.

Suggested Citation

  • Doron Avramov & Tarun Chordia & Amit Goyal, 2006. "Liquidity and Autocorrelations in Individual Stock Returns," Journal of Finance, American Finance Association, vol. 61(5), pages 2365-2394, October.
  • Handle: RePEc:bla:jfinan:v:61:y:2006:i:5:p:2365-2394
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