COVID-19, Stock Liquidity, and Abnormal Returns

This paper examines the relationship between ex-ante stock liquidity and abnormal returns during various phases of COVID-19 led market uncertainties in India. We find that the volume-based liquidity supports stock more significantly during the crisis than in periods of calm. However, contrary to existing empirical evidence, price-based liquidity penalizes stocks during a crisis. Moreover, during periods of calm and recovery, the inverse relationship of liquidity-abnormal return reverses. Further analysis shows that this change of price-based liquidity to abnormal return relationship is more prominent in firms with higher ex-ante liquidity. In contrast, highly illiquid firms appear immune.