n Management Dynamics : Journal of the Southern African Institute for Management Scientists - Liquidity as an investment style : evidence from the Johannesburg Stock Exchange




In the mid-1980s it was suggested that liquidity might be a factor influencing stock returns. However, in the South African equity market, studies of this so-called liquidity effect are still limited. This study analysed liquidity as a risk factor on the Johannesburg Stock Exchange (JSE) during the period 1996 to 2012, using different methodologies from those employed in previous South African studies. In contrast to most United States-based studies, this study found that liquidity is not a significant risk factor affecting broad market returns. Instead, the effect is significant in small- and low-liquidity portfolios only. However, the study found that including a liquidity factor improved the Fama-French three-factor model in capturing shared variation in stock returns. Finally, incorporating a liquidity style into two passive portfolio strategies yielded weak evidence of enhanced risk-adjusted performance.


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