Economic valuation of liquidity timing

Dennis Karstanje, Elvira Sojli, Wing Wah Tham and Michel van der Wel ()

Journal of Banking & Finance, 2013, vol. 37, issue 12, 5073-5087

Abstract: This paper conducts a horse-race of different liquidity proxies using dynamic asset allocation strategies to evaluate the short-horizon predictive ability of liquidity on monthly stock returns. 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 et al., 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.

Keywords: Liquidity; Forecasting; Expected returns; Economic valuation (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: Economic Valuation of Liquidity Timing (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:12:p:5073-5087

DOI: 10.1016/j.jbankfin.2013.09.010

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