Department of Economics and Business Economics

Economic valuation of liquidity timing

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

  • D. Karstanje, Erasmus University Rotterdam
  • ,
  • E. Sojli, Erasmus University Rotterdam
  • ,
  • W.W. Tham, Erasmus University Rotterdam
  • ,
  • Michel van der Wel
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.
Original languageEnglish
JournalJournal of Banking & Finance
Volume37
Issue12
Pages (from-to)5073-5087
Number of pages15
ISSN0378-4266
DOIs
Publication statusPublished - 1 Dec 2013

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