Three essays on liquidity and price information of stock market

Abstract

This dissertation consists of three essays on liquidity and price information of stock market. The first essay suggests a new measure of market resiliency and demonstrates that resiliency is a dimension of liquidity that generates cross-sectional variations in stock returns. Resiliency is defined as quickness of the transitory price recovery from a liquidity shock. The main finding is that a zero-investment portfolio long in low-resiliency stocks and short in high-resiliency stocks earns significant abnormal returns. I also find that the suggested resiliency measure is complementary to existing liquidity measures. The second essay investigates the component of the price impact that plays the main role in asset pricing by decomposing the price impacts into permanent and transitory price impacts, and then further decompose each of these price impacts into half-price impact measures that correspond to positive and negative return days and good and bad news days, respectively. Among the eight decomposed half-price impact measures, the transitory half-price impact associated with bad news days is the main component. Based on this finding, I suggest a new price impact measure, net price impact, defined as the average net ratio of the daily transitory deviation to share turnover and further find that the suggested price impact measure better in explains future stock returns than existing price impact measures. The third essay investigates whether foreign investors have information advantage over domestic investors by testing for the speed of price adjustment in Korea. I find that, while the stocks with high foreign ownership have higher speed of price adjustment to support foreign investors’ information advantage in the low-correlation regimes between world and local stock market, the evidence becomes weaker in the high-correlation regimes.