WSEAS Transactions on Mathematics
Print ISSN: 1109-2769, E-ISSN: 2224-2880
Volume 12, 2013
The Effect of Liquidity on Stock Returns: A Style Portfolio Approach
Authors: , ,
Abstract: In stock market, various concepts of stocks, or investment styles, have been raised by fund managers to catch the attention of investors. Style investing was referred to as investing stocks with similar company characteristics to form a style portfolio in order to obtain abnormal returns. Since liquidity in stock trading was important information for investors in investment decision-making, this study examined whether there existed the effect of liquidity, i.e., trading turnover, on stock returns by applying the style portfolio approach to test statistical significance of short-run abnormal returns and long-run cumulative returns of several liquidity-related style portfolios. With the data of Taiwan publicly-listed companies, three findings were concluded: First, the high liquid stocks were found to have higher cumulative returns relative to those of the benchmark portfolio, the market, for the period of 1999-2008. Second, when we integrated stock liquidity into company characteristic and firm size to form two-dimensional style portfolios, stock returns of those style portfolios were significantly higher than those of one-dimensional style portfolios, meaning that the liquidity effect could amplify conventional market anomalies, such as the value effect and the size effect. Third, the returns of the liquidity-related portfolios were also significant in different market conditions. The study therefore concluded that the liquidity effect was a significant investment style in stock market.