Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87374
Authors: 
Karstanje, Dennis
Sojli, Elvira
Tahm, Wing Wah
van der Wel, Michel
Year of Publication: 
2013
Series/Report no.: 
Tinbergen Institute Discussion Paper 13-156/IV/DSF64
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, 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.
Subjects: 
Liquidity
forecasting
expected returns
economic valuation
JEL: 
G11
G12
G17
Document Type: 
Working Paper

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