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    Systematic Liquidity Risk and Stock Price Reaction to Large One-Day Price Changes: Evidence from London Stock Exchange.

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    Title_Alrabadi.pdf (393.6Kb)
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    References.pdf (268.4Kb)
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    Chapter One.pdf (126.3Kb)
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    Chapter Four.pdf (246.9Kb)
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    Chapter Five-mod.pdf (715.4Kb)
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    Chapter Six.pdf (778.4Kb)
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    Chapter Seven.pdf (803.7Kb)
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    Chapter Eight.pdf (112.4Kb)
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    Appendix A.pdf (1.244Mb)
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    Appendix C--.pdf (894.5Kb)
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    Appendix D.pdf (88.50Kb)
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    Publication date
    2010-06-04T15:00:20Z
    Author
    Alrabadi, Dima W.H.
    Supervisor
    Mazouz, Khelifa
    Keyword
    Systematic liquidity risk
    Asset pricing
    Large one-day price changes
    Time-varying risk
    S-GARCH
    Efficient market hypothesis
    Underreaction
    Overreaction
    London Stock Exchange
    Stock prices
    Rights
    Creative Commons License
    The University of Bradford theses are licenced under a Creative Commons Licence.
    Institution
    University of Bradford
    Department
    School of Management
    Awarded
    2009
    
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    Abstract
    This thesis investigates systematic liquidity risk and short-term stock price reaction to large one-day price changes. We study 642 constituents of the FTSALL share index over the period from 1st July 1992 to 29th June 2007. We show that the US evidence of a priced systematic liquidity risk of Pastor and Stambaugh (2003) and Liu (2006) is not country-specific. Particularly, systematic liquidity risk is priced in the London Stock Exchange when Amihud's (2002) illiquidity ratio is used as a liquidity proxy. Given the importance of systematic liquidity risk in the asset pricing literature, we are interested in testing whether the different levels of systematic liquidity risk across stocks can explain the anomaly following large one-day price changes. Specifically, we expect that the stocks with high sensitivity to the fluctuations in aggregate market liquidity to be more affected by price shocks. We find that most liquid stocks react efficiently to price shocks, while the reactions of the least liquid stocks support the uncertain information hypothesis. However, we show that time-varying risk is more important than systematic liquidity risk in explaining the price reaction of stocks in different liquidity portfolios. Indeed, the time varying risk explains nearly all of the documented overreaction and underreaction following large one-day price changes. Our evidence suggests that the observed anomalies following large one-day price shocks are caused by the pricing errors arising from the use of static asset pricing models. In particular, the conditional asset pricing model of Harris et al. (2007), which allow both risk and return to vary systematically over time, explain most of the observed anomalies. This evidence supports the Brown et al. (1988) findings that both risk and return increase in a systematic fashion following price shocks.
    URI
    http://hdl.handle.net/10454/4323
    Type
    Thesis
    Qualification name
    PhD
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