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Illiquidity shocks and the size effect: an event study of liquidity crises.
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This paper empirically investigates the impact of liquidity on stock returns during liquidity crises. An event study approach is employed to analyse the behaviour of stock returns around periods of crisis. The focus is set on the different effect of liquidity shocks on large and small/medium caps. Tests for the presence of abnormal returns show that small/medium stocks are negatively affected by crashes in market liquidity, while blue chips performance is not significantly influenced by the crises. The abnormal returns for small caps occur immediately after the liquidity crises and the impact generally lasts for the 15 following trading days. From a buy-and-hold perspective the deviation from the predicted performance can account for up to -1.7%.
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Liquidity Event study Crisis Company size