The Liquidity Effect in Taiwan's Stock Market

摘要

In Taiwan stock market, various concepts of stocks, or so-called investment styles, have been raised by fund managers to catch the attention of investors. Style investing is referred to as investing stocks with similar company characteristics to form a style portfolio in order to obtain excess returns. Since investors would use liquidity to make investment decisions, this study examines whether there is a liquidity effect in Taiwan stock market by applying the style portfolio approach to test the statistical significance of short-run and long-run excess returns among several liquidity-related style portfolios. With the data of Taiwan publicly-listed companies, three findings are concluded: First, the high liquid stocks are found to have a higher cumulative return of 193.40% relative to the benchmark portfolio, the market, for the period of 1999-2008. Second, when we integrate the stock liquidity into company characteristic and firm size to form two dimensional style portfolios, the returns of those are significantly higher than the returns of one dimensional style portfolios, such as liquidity, value, and small-cap stocks. Third, the returns of the liquidity-related portfolios are also significant in different market conditions. The study therefore concludes that liquidity is an effective investment style in Taiwan stock market.