Skip Navigation



RFS Advance Access published online on May 25, 2005
Review of Financial Studies, doi:10.1093/rfs/hhi023
This Article
Right arrow Advance Access manuscript (PDF)
Right arrow All Versions of this Article:
18/3/981    most recent
hhi023v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Hou, K.
Right arrow Articles by Moskowitz, T. J.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

Article

Market Frictions, Price Delay, and the Cross-Section of Expected Returns*

Kewei Hou 1* and Tobias J. Moskowitz 2
1 Fisher College of Business, The Ohio State University
2 Graduate School of Business, University of Chicago and NBER

* To whom correspondence should be addressed.
Kewei Hou, E-mail: tobias.moskowitz{at}gsb.uchicago.edu


  Abstract

We parsimoniously characterize the severity of market frictions affecting a stock using the delay with which its price responds to information. The most delayed firms command a large return premium not explained by size, liquidity, or microstructure effects. Moreover, delay captures part of the size effect, idiosyncratic risk is priced only among the most delayed firms, and earnings drift is monotonically increasing in delay. Frictions associated with investor recognition appear most responsible for the delay effect. The very small segment of delayed firms, comprising only 0.02% of total market, generates substantial variation in average returns, highlighting the importance of frictions.

*We thank John Cochrane, Eugene Fama, Russ Fuller, Campbell Harvey, John Heaton, David Hirshleifer, Andrew Karolyi, Owen Lamont, Tim Loughran, Rajnish Mehra, Bonnie Clark Moskowitz, Lubos Pastor, Monika Piazzesi, René Stulz, Bhaskaran Swaminathan, Richard Thaler, Annette Vissing-Jørgensen, two anonymous referees, and seminar participants at Michigan State, Rochester, UCLA, UCSB, USC, Columbia, Ohio State, Rice University, the University of Chicago Finance lunch, and Fuller and Thaler Asset Management for valuable comments and suggestions as well as Martin Joyce for outstanding research assistance. Data provided by BARRA Associates, Lubos Pastor, and Soeren Hvidkjaer is gratefully acknowledged, and we thank I/B/E/S for making their data available for academic use. We are grateful for funding from a research grant from the Institute for Quantitative Research in Finance, "the Q Group," for supporting this project. Hou thanks the Dice Center for Research in Financial Economics for financial support. Moskowitz thanks the Center for Research in Security Prices, the Dimensional Fund Advisors Research Fund, and the James S. Kemper Foundation for financial support.
Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?


This article has been cited by other articles:


Home page
 REV FINANC STUDHome page
K. Hou
Industry Information Diffusion and the Lead-lag Effect in Stock Returns
Rev. Financ. Stud., July 1, 2007; 20(4): 1113 - 1138.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
J. M. Griffin, F. Nardari, and R. M. Stulz
Do Investors Trade More When Stocks Have Performed Well? Evidence from 46 Countries
Rev. Financ. Stud., May 1, 2007; 20(3): 905 - 951.
[Abstract] [Full Text] [PDF]


Disclaimer:
Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.