Does Stock Liquidity Explain the Premium for Stock Price Momentum?
Year: 2014 Volume: 64 Issue: 1 Pages: 79-95
Abstract: The empirically documented positive relationship between price momentum and subsequent stock returns constitutes a puzzle that evades a compelling theoretical explanation. This study analyzes one of the proposed explanations, namely that momentum is correlated with stock liquidity, which is the underlying factor affecting stock returns. We empirically test this proposition using the pre-crisis data from the Stockholm Stock Exchange covering the period between 1979 and 2005. The results from the Fama-MacBeth (1973) regressions provide some evidence that liquidity proxies are negatively correlated with average stock returns. However, contrary to the common prediction the inclusion of liquidity proxies does not significantly impact the explanatory power of momentum. This implies that stock liquidity is not a likely driver of short-term persistence in stock returns.
JEL classification: G12, C21
Keywords: asset pricing, momentum, liquidity, bid-ask spread, trading volume, stock turnover, cross-sectional multifactor models, stock returns, Sweden
RePEc: http://ideas.repec.org/a/fau/fauart/v64y2014i1p79–95.html
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