An earnings, liquidity, and market model

Robert G. Snigaroff and David Wroblewski

Applied Economics, 2018, vol. 50, issue 57, 6220-6248

Abstract: We combine the market with earnings, liquidity and their respective growth, with motivation via a simple pricing equation, to model the cross-section with three, four and five factors. As first-order variables in widespread investor use for over a hundred years, earnings and liquidity have ready connection to investor preferences. They obtain as good a cross-sectional description of security prices as other factor models without redundancy. We weight portfolios on volume, relying on a direct SDF representation of investor’s preference for liquidity, demonstrating its additional dimension. Recent research arguing for the demise of liquidity is premature; indeed, its importance has grown.

Date: 2018
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DOI: 10.1080/00036846.2018.1495826

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