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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 Y.-J. 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 Y.-J. 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
United States
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 Young-joon 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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