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Stock returns, illiquidity and feedback trading

Chen, Jing and McMillan, David 2020. Stock returns, illiquidity and feedback trading. Review of Accounting and Finance 19 (2) , pp. 135-145. 10.1108/RAF-02-2017-0024

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Abstract

We examine the relation between illiquidity, feedback trading and stock returns for several European markets, using panel regression methods, during the financial and the sovereign debt crises. Our interest here is twofold. First, we seek to compare the results obtained here, under crisis conditions, with those in the existing literature. Second, and of greater importance, we wish to examine the interaction between liquidity and feedback trading and their effect on stock returns. The key results suggest that in common with the literature, illiquidity has a negative impact upon contemporaneous stock returns, while supportive evidence of positive feedback trading is reported. However, in contrast to the existing literature, lagged illiquidity is not a priced risk, while negative shocks do not lead to greater feedback trading behaviour. Regarding the interaction between illiquidity and feedback trading, our results support the view that greater illiquidity is associated with stronger positive feedback. This suggests that when price changes are more observable, due to low liquidity, then feedback trading increases. Therefore, during the crisis periods that afflicted European markets, the prevalent lower levels of liquidity led to an increase in feedback trading. Thus, negative liquidity shocks that led to a fall in stock prices were exacerbated by feedback trading.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Mathematics
Subjects: H Social Sciences > HG Finance
Publisher: Emerald
ISSN: 1475-7702
Date of First Compliant Deposit: 24 August 2018
Date of Acceptance: 24 August 2018
Last Modified: 10 Jun 2020 12:46
URI: http://orca-mwe.cf.ac.uk/id/eprint/114353

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