Liquidity and anomalies: study on stock market liquidity and its affect on momentum and value investment returns.

Abstract

Purpose of the study:

This study focuses on the links between stock market liquidity and two of the most studied stock market anomalies: momentum effect and value effect. The aim is to increase knowledge from this area using daily stock market data and to confirm previous results often made using monthly stock market data.

Data:

There are two data sets used in this study. The first part is the daily NYSE stock market data obtained from the CRSP database. The second part is the daily Fama French three factors data downloaded from Kenneth French's webpage. The collected data is used to build nine different investment portfolios and six different liquidity factors.

Results:

First, the findings show no positive alphas for momentum or value investment strategies during the post 2008 financial crisis period. Second, there is a negative relationship between liquidity shocks and value investment returns, and positive relationship between liquidity shocks and momentum investment returns. Third, the unexpected liquidity shocks, rather than the expected changes in stock market liquidity, forecast momentum and value investment returns. And finally, the positive liquidity shocks have stronger effects than the negative shocks, both in statistical significance and in magnitude, when explaining future momentum and value investment returns.