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Transitory prices, resiliency, and the cross-section of stock returns

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  • Kim, Jinyong
  • Kim, Yongsik

Abstract

This paper suggests a new measure of stock market resiliency and demonstrates that resiliency is a dimension of liquidity that generates cross-sectional variations in stock returns. Resiliency is defined as quickness of the transitory price recovery from a liquidity shock. Using the Beveridge-Nelson decomposition and the spectral analysis in the frequency domain, we measure resiliency as the speed of mean reversion of transitory price components. Our main finding is that a zero-investment portfolio long in low-resiliency stocks and short in high-resiliency stocks earns significant abnormal returns. We also find that our resiliency measure is complementary to existing liquidity measures.

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  • Kim, Jinyong & Kim, Yongsik, 2019. "Transitory prices, resiliency, and the cross-section of stock returns," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 243-256.
    • Handle: RePEc:eee:finana:v:63:y:2019:i:c:p:243-256
    DOI: 10.1016/j.irfa.2018.11.009
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    Cited by:

    1. Priyanka Naik & B G Poornima & Y V Reddy, 2020. "Measuring liquidity in Indian stock market: A dimensional perspective," PLOS ONE, Public Library of Science, vol. 15(9), pages 1-17, September.
    2. Kim, Jinyong & Kim, Yongsik, 2023. "Which stock price component drives the Amihud illiquidity premium?," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Resiliency; Liquidity; Transitory prices;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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