Liquidity as an Investment Style

34 Pages Posted: 24 Apr 2011 Last revised: 24 May 2013

See all articles by Roger G. Ibbotson

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

Zhiwu Chen

University of Hong Kong, Faculty of Business Economics (HKU Business School); Asia Global Institute, University of Hong Kong

Daniel Kim

Sweetwater Digital Asset Consulting, LLC

Wendy Yunchun Hu

Zebra Capital Management, LLC

Date Written: August 24, 2012

Abstract

We present comprehensive evidence in support of giving liquidity equal standing to size, value/growth, and momentum as investment styles, as defined by Sharpe (1992). First, we show that financial market liquidity, as identified by stock turnover, is an economically significant indicator of long-term returns. Then, we show that liquidity, as a characteristic, is not merely a substitute for size, value, and/or momentum. Finally, we show that liquidity has historically been a relatively stable characteristic of stocks, and that changes in liquidity are associated with changes in valuations.

Keywords: liquidity, investment style, size, value, momentum, turnover, stock returns, factors, Sharpe

JEL Classification: A23, D40, D46, D50, D51, D52, D59, D80, D81, D83, D84, D89, G10, G11, G12, G14, G18, G19, G23, G24

Suggested Citation

Ibbotson, Roger G. and Chen, Zhiwu and Kim, Daniel and Hu, Wendy Yunchun, Liquidity as an Investment Style (August 24, 2012). Financial Analysts Journal, Vol. 69, No. 3, 2013, Available at SSRN: https://ssrn.com/abstract=1817889 or http://dx.doi.org/10.2139/ssrn.1817889

Roger G. Ibbotson (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
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Zebra Capital Management, LLC ( email )

2187 Atlantic Street
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203 701 5900 (Phone)

Zhiwu Chen

University of Hong Kong, Faculty of Business Economics (HKU Business School) ( email )

Pokfulam Road
Hong Kong
Hong Kong

Asia Global Institute, University of Hong Kong ( email )

Room 328-348, Main Building
The University of Hong Kong
Pokfulam
Hong Kong

Daniel Kim

Sweetwater Digital Asset Consulting, LLC ( email )

202 Washington St
Suite 321
Brookline, MA 02445
United States
6173967882 (Phone)

Wendy Yunchun Hu

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

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