Abstract
We investigate the price behavior of stock market portfolios sorted by liquidity and/or size surrounding strong market events. Our sample includes 74 events that represent return movements for the market that are ±4.5 standard deviations from average returns. None of these market events are associated with explanatory ‘causes.’ Using standard liquidity measures, the Amihud and turnover tests, we find that large liquid stocks react in a stronger manner to market shocks. In addition, these stocks experience faster reversal following the shocks than do illiquid and small stocks. We interpret this as indicating that large liquid stocks are more market related. We also find that small illiquid stocks have more idiosyncratic risk than liquid and large stocks. These outcomes have implications for investors wanting to construct portfolios to mimic the market and also for portfolios that might be expected to move more (or less) strongly during market events.
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