Liquidity as an Investment Style

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.

Number of Pages in PDF File: 34

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

working papers series