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Liquidity as an Investment Style

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

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

Zhiwu Chen

University of Hong Kong; Yale University - International Center for Finance; Zebra Capital Management, LLC

Daniel Kim

Zebra Capital Management, LLC

Wendy Yunchun Hu

Zebra Capital Management, LLC

Multiple version iconThere are 2 versions of this paper

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
P.O. Box 208200
New Haven, CT 06520-8200
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203-432-6021 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

Zhiwu Chen

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520-8200
United States
203-432-5948 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

Daniel Kim

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States
+12038783223 (Phone)

HOME PAGE: http://research.zebracapital.com

Wendy Yunchun Hu

Zebra Capital Management, LLC ( email )

612 Wheelers Farms Road
Milford, CT 06461
United States

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