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Liquidity shock and stock returns in the Japanese equity market

Yasuhiro Iwanaga and Takehide Hirose

Pacific-Basin Finance Journal, 2022, vol. 75, issue C

Abstract: We investigate the relationship between liquidity shocks and stock returns in the Japanese equity market. As in the US equity market, we observe an irrational phenomenon: Stocks with positive liquidity shocks have higher future returns than stocks with negative liquidity shocks. This phenomenon may be caused by an underreaction to liquidity shocks. We show that illiquidity strongly contributes to this underreaction, unlike the US equity market. Additionally, we uncover new facts that were not previously known. We show that liquidity shocks caused by bad news is more quickly priced than those caused by good news. We also find that pricing on liquidity shocks in the cross-section may be affected by time-varying market liquidity shocks.

Keywords: Liquidity shock; Stock market reactions; Underreaction; Japan (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:75:y:2022:i:c:s0927538x22001445

DOI: 10.1016/j.pacfin.2022.101849

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