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Liquidity shock and stock returns in the Japanese equity market

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  • Iwanaga, Yasuhiro
  • Hirose, Takehide

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.

Suggested Citation

  • Iwanaga, Yasuhiro & Hirose, Takehide, 2022. "Liquidity shock and stock returns in the Japanese equity market," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:pacfin:v:75:y:2022:i:c:s0927538x22001445
    DOI: 10.1016/j.pacfin.2022.101849
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    1. Iwanaga, Yasuhiro & Hirose, Takehide, 2023. "Liquidity changes and decomposition in the Japanese equity market," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Liquidity shock; Stock market reactions; Underreaction; Japan;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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