Liquidity and Autocorrelations in Individual Stock Returns





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    • Doron Avramov is from the University of Maryland, Tarun Chordia and Amit Goyal are from the Goizueta Business School, Emory University. We thank Yakov Amihud, Ryan Davies, Soeren Hvidkjaer, Narasimhan Jegadeesh, Don Keim, S.P. Kothari, Bruce Lehmann, Francis Longstaff, Jim Rosenfeld, Jay Shanken, Avanidhar Subrahmanyam, Ashish Tiwari, and seminar participants at the Atlanta Federal Reserve, Emory University, the NBER Market Microstructure conference, Vanderbilt University, and the Western Finance Association 2005 conference for helpful comments. We are especially grateful to an anonymous referee and an associate editor whose comments and suggestions have greatly improved the paper and to Ronnie Sadka for providing us the data on market impact costs. All errors are our own.


This paper documents a strong relationship between short-run reversals and stock illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in high turnover, low liquidity stocks, as the price pressures caused by non-informational demands for immediacy are accommodated. However, the contrarian trading strategy profits are smaller than the likely transactions costs. This lack of profitability and the fact that the overall findings are consistent with rational equilibrium paradigms suggest that the violation of the efficient market hypothesis due to short-term reversals is not so egregious after all.