| This dissertation consists of three essays. In the first, we find that persistence in liquidity is related to the returns on common stocks. Returns on persistently illiquid stocks are found to be higher than stocks that are only temporarily illiquid. The reverse holds true for the highly liquid stocks: persistently liquid stocks yielded lower returns than stocks that are only temporarily liquid. Interestingly, such abnormal return tends to strengthen in magnitude as persistence increases. The pattern is observed in data for the period 1980--2000 in the U.S. stock market, and appears robust after controlling for market risk, size, book-to-market, momentum, bid-ask bounces, and transaction cost. Besides, "deviations" from persistent liquidity levels also contain important information, whose value increases as persistence increases. We advance a plausible economic argument for our findings by relating investors' ability to infer a stock's current liquidity from its persistence characteristics, and how learning about liquidity affects stock returns.; In the second essay, we find that the common movement of liquidity, as documented in Chordia, Roll, and Subrahmanyam (2000), exhibits asymmetry under certain conditions. For large stocks, bid-ask spreads tend to shrink together in a rising market, but not widen together. For small stocks, such pattern is not observed. We claim that correlated uninformed trading in large stocks is crucial in producing the observed asymmetric commonality. Besides, the argument in this paper predicts an opposite asymmetry: in a declining market, large stocks should widen in spreads together, but not shrink in spreads together.; The third paper explores the role of affects in trading behavior observed in financial markets. We first provide a brief overview of psychological literature on affect heuristics. Focusing on the theme that positive/negative affects influence investors' assessment of risk and return, and the observed inverse relationship between perceived risk and perceived benefit, we analyze the potential consequences of affects induced by past volume and price patterns in investors' risk assessment and trading behavior. At the end, we also provide a speculative discussion on decision heuristics, rational behavior, and market efficiency. |
