Time-Varying Momentum Payoffs and Illiquidity

Abstract

This paper shows that the momentum payoffs strongly vary with market illiquidity, consistent with b

ehavioral models of investor overconfidence. Periods of high market illiquidity are associated with overconfident investors staying out of the market as well as widening differences in the illiquidity of winner and loser stocks. Consequently, illiquid periods are followed by low, and often massively negative, momentum payoffs. The predictive power of market illiquidity uniformly exceeds that of competing state variables, including marketreturn states, market volatility, and investor sentiment. While price and earnings momentum are nonexistent in the most recent decade, they become significant following low market illiquidity.

The article can be downloaded from the Finance Accounting seminar webpage:

http://recanati-bs.tau.ac.il/Eng/?CategoryID=639&ArticleID=1944&dbsAuthToken=2xj7wl1Ett&rnd=2694790