Stock Price Delay and the Business Cycle
52 Pages Posted: 16 Feb 2018
Date Written: April 15, 2015
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: Suggested Citation