1 research outputs found
Liquidity risk : an opportunity to open the window after closing a door
Investors can incur in substantial losses if they cannot trade an asset at a desired price at a specific moment – this is liquidity risk. However, this may also pose as an advantage. We prove the relevance of liquidity in an investment strategy using liquidity both as a characteristic for investment decision and as an asset, through liquidity sorted portfolios. Liquidity provides significant improvements in investment performance, especially when allocating for small size stocks. After finding the significance of liquidity during recession periods but not during expansions, we propose a successful asset allocation strategy conditional on announcements timing of business cycles. Liquidity is relevant and you can profit from it – it is the open window when all the doors are closed