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Liquidity components: Commonality in liquidity, underreaction, and equity returns

Barıs Ince
Journal of Financial Markets 2022 60, 100730 open access
I decompose firm-specific monthly-varying illiquidity into three components: (i) alpha, (ii) systematic, and (iii) idiosyncratic. Investors demand a premium to hold stocks with high systematic illiquidity. However, the systematic illiquidity premium disappears when very small stocks are excluded. On the other hand, investors tend to underreact to idiosyncratic (il)liquidity. Hence, stocks with high (low) idiosyncratic liquidity generate positive (negative) future risk-adjusted returns. More specifically, stocks in the highest idiosyncratic liquidity quintile generate 7% more annualized risk-adjusted return compared to stocks in the lowest idiosyncratic liquidity quintile.

Recovery from fast crashes: Role of mutual funds

Ravi Jagannathan; Loriana Pelizzon; Ernst Schaumburg; Mila Getmansky Sherman; Darya Yuferova
Journal of Financial Markets 2022 59, 100646 open access
We study the role mutual funds play in the recovery from fast intraday crashes based on data from the National Stock Exchange of India for a single large stock. During normal times, trading activity and liquidity provision by mutual funds is negligible compared to other traders at around 4% of overall activity. Nevertheless, for the two intraday market-wide crashes in our sample, price recovery took place only after mutual funds moved in. Market stability may require the presence of well-capitalized standby liquidity providers for recovery from fast crashes.