Abstract

http://ssrn.com/abstract=2225758
 
 

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Economic Valuation of Liquidity Timing


Dennis Karstanje


Erasmus University Rotterdam; Tinbergen Institute

Elvira Sojli


RSM Erasmus University; Duisenberg School of Finance

Wing Wah Tham


Erasmus School of Economics - Econometric Institute

Michel Van der Wel


Erasmus University Rotterdam; CREATES; ERIM; Tinbergen Institute

July 1, 2013

Journal of Banking and Finance, 37, p5073-5087

Abstract:     
This paper provides a comprehensive economic evaluation of the short-horizon predictive ability of liquidity on monthly stock returns, using dynamic asset allocation strategies. We assess the economic value of the out-of-sample power of empirical models based on different liquidity measures and find three key results: liquidity timing leads to tangible economic gains; a risk-averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on various liquidity measures to one that conditions on the Zeros measure (Lesmond, Ogden, and Trzcinka, 1999); the Zeros measure outperforms other liquidity measures because of its robustness in extreme market conditions. These findings are stable over time and robust to controlling for existing market return predictors or considering risk-adjusted returns.

Number of Pages in PDF File: 46

Keywords: liquidity, forecasting, expected returns, economic valuation

JEL Classification: G11, G12, G17

Accepted Paper Series





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Date posted: February 28, 2013 ; Last revised: August 5, 2014

Suggested Citation

Karstanje, Dennis and Sojli, Elvira and Tham, Wing Wah and van der Wel, Michel, Economic Valuation of Liquidity Timing (July 1, 2013). Journal of Banking and Finance, 37, p5073-5087. Available at SSRN: http://ssrn.com/abstract=2225758 or http://dx.doi.org/10.2139/ssrn.2225758

Contact Information

Dennis Karstanje (Contact Author)
Erasmus University Rotterdam ( email )
HOME PAGE: http://www.karstanje.com
Tinbergen Institute ( email )
Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
Elvira Sojli
RSM Erasmus University ( email )
Finance Department T9-33
Burgemeester Oudlaan 50, PO Box 1738
Rotterdam, 3000DR
Netherlands
0031104082824 (Phone)
HOME PAGE: http://www.rsm.nl/people/elvira-sojli/
Duisenberg School of Finance ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
Wing Wah Tham
Erasmus School of Economics - Econometric Institute ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
HOME PAGE: http://people.few.eur.nl/tham/
Michel Van der Wel
Erasmus University Rotterdam ( email )
Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands
CREATES ( email )
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark
ERIM ( email )
P.O. Box 1738
3000 DR Rotterdam
Netherlands
Tinbergen Institute ( email )
Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
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