Earnings and Liquidity Factors

Abstract:  A model with factors for earnings, liquidity, their respective growth, and the market can offer a consumption rationale with low pricing error. It also subsumes one-year momentum and momentum net of reversal, the factor commonly known as ‘momentum.’ These earnings and liquidity factors are all significant and combine for a model without factor redundancy. Motivated by investors’ ability to establish positions, we construct portfolios based on volume, and reconcile liquidity into reduced form characteristics-based factor models that compliment firm-based factors.

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