Abstract
In this study, we investigate the relationship between liquidity changes and stock returns in the Japanese stock market. The results confirm that stocks with increased liquidity have higher stock returns than those with decreased liquidity. This phenomenon indicates that the market under-reacts to changes in liquidity. We also decompose liquidity and analyze how each component is priced. We confirm that stock-specific long-term liquidity changes relate negatively to stock returns in the following month, while stock-specific short-term liquidity changes relate positively to stock returns in the following month. The sensitivity of changes in the liquidity of individual stocks to changes in market liquidity was found not to be priced.
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