Economic Valuation of Liquidity Timing

Dennis Karstanje, Elvira Sojli, Wing Wah Tham and Michel van der Wel ()
Additional contact information
Dennis Karstanje: Erasmus University Rotterdam
Wing Wah Tham: Erasmus University Rotterdam

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper resulted in a publication in the 'Journal of Banking and Finance' (2013). Vol. 37, issue 12, pages 5073-5087.

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, 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.

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: 2013-10-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://papers.tinbergen.nl/13156.pdf (application/pdf)

Related works:
Journal Article: Economic valuation of liquidity timing (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20130156

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().