Stock Returns in Thinly Traded Markets

Abstract

AbstractWe examine the share price behavior of thinly traded NASDAQ National Market System stocks during periods when financial markets are open but the individual stocks do not trade. The absence of trade allows us to isolate the effect of nontrading from that of market closure. We find that nontrading stocks have negative mean returns and lower variances regardless of whether markets are open or closed. Two‐day returns that include one nontrading day have a mean daily return of ‐0.226% compared to +0.164% for two‐day returns over consecutive trading days. Two‐day returns that include one nontrading day have only 3.8% higher variance than one‐day returns. We conclude that the relation between transaction arrival, mean returns, and volatility depends on whether a stock is trading and not simply on whether the market is open.