This paper focuses on explaining the effect of liquidity shocks on asset prices. This is the first paper that finds that negative liquidity shocks lead to lower stock prices in the short run; yet the initial underperformance only lasts for short period and is reversed in the longer time horizon....

Whether or not anomalies are due to mispricing or risk is an important question. We examine the causal effect of a novel shock to short selling, the Job and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, on an extensive set of 182 anomalies. We find that anomalies become stronger after...

We find that the stock-level liquidity shock bears information about the firm's future fundamentals. Firms with improving (deteriorating) liquidity reveal better (worse) future fundamentals following the liquidity shock. The finding explains the predictability of liquidity shocks on future stock...