PIN AND THE EFFECT OF ILLIQUIDITY ON ABNORMAL STOCK RETURN: EVIDENCE FROM US AND CHINA MARKETS

Abstract

This study examines the relationship between PIN and Amihud’s illiquidity measure and a strong positive relationship is confirmed. Based on panel analyses of quarterly and annual PIN against illiquidity, both fixed effect and time effect are studied. Fixed effect is important in explaining PIN variations in both annual and quarterly PIN model whereas time effect is significant in the annual PIN model and less significant in quarterly PIN model. We also document that there is a decrease in time effect from 1983 to 2001. Furthermore, we identify pre and post event abnormal stock return behaviors for dates with high illiquidity and dates with high illiquidity change. We find significant sharp drop in abnormal return on the event date and sharp increase on the next day. The US, China Shanghai and China Shen Zhen markets traced out different abnormal return patterns for both types of dates. Six portfolio simulations are performed based on the observations and the annual gains are found to fluctuate.