Stock Price Delay and the Business Cycle

52 Pages Posted: 16 Feb 2018

See all articles by Ji-Chai Lin

Ji-Chai Lin

Hong Kong PolyU

Ping-Wen Sun

Minjiang University - Newhuadu Business School

Date Written: April 15, 2015

Abstract

Hou and Moskowitz (2005) use the stock price delay in reflecting market-wide information to measure market frictions each individual firm faces. In this study, to better understand how the price formation process is affected by the business cycle, we examine the relation between changes in the aggregate stock price delay and changes in the economy. Surprisingly, while the stock market liquidity declines and market frictions increase before economic downturns, we find that the aggregate stock price delay decreases before recessions; and it increases before economic expansions when the stock market liquidity increases and market frictions decrease. Aggregate analyst coverage and aggregate analyst forecast dispersion as proxies for information production cannot account for the behavior of the aggregate stock price delay. Instead, we find that the flight-to-quality behavior of investors is most responsible for changes in the aggregate stock price delay.

Keywords: price delay, business cycle, flight-to-quality

JEL Classification: E32, G12, G14, G17

Suggested Citation

Lin, Ji-Chai and Sun, Ping-Wen, Stock Price Delay and the Business Cycle (April 15, 2015). Available at SSRN: https://ssrn.com/abstract=3118208 or http://dx.doi.org/10.2139/ssrn.3118208

Ji-Chai Lin

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Ping-Wen Sun (Contact Author)

Minjiang University - Newhuadu Business School ( email )

Fujian
China

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