The Two Factor Model Of Lau (2006

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The main focus of the paper is on the two factor model of Liu (2006) using the current CRSP accumulation of the trading volume data daily during the time period of 1926 to 1962. The literature based on liquidity has been divided into three segments in the past studies conducted which are: Firstly, the search for liquidity proxies which has been conducted by Amihud and Mendelson (1986) where they suggest the bid ask spread measure and the research done by Datar et al. (1998) use turnover as an alternative; Secondly, the research is examined to show that liquidity is systematic which has been done by Chordia et al. (2000) and Huberman and Halka (2001); Finally the third range of studies talk about of incorporating the liquidity risk into an asset …show more content…
The two factor model not only explains some of the missing attributes of the factor model Fama and French (1993) but also describes the fundamental to price ratios (such as Earnings to price, book to market, dividend to price and cashflow to price), returns to portfolio on size and the contrarian strategy of DeBondt and Thaler (1985). This paper also discusses the relation between risk using pooled cross section time series and liquidity as a firm characteristic in the least squares regression over the period before 1963 and aftermath of …show more content…
The data has been collected for the same period and monthly for the return and market capitalisation. The data used to obtain equity information for the book to market ratio has been collected from COMPUSTAT database for 1951 to 2005 and Moody’s manual by Davis et al. (2000) for book equity going back till the year 1925. The sample also includes all common stocks of NYSE/NASDAQ/AMEX for the period January 1926 to December 2005. The Panel A of Table 1 provides the descriptive statistics for the above mentioned variables spanning a time period from 1926 to 1963 while Panel B shows the similar results in comparison to Liu (2006). The methodology used is compared to the return predictability of the turnover and return to volume ratio of Amihud (2002) and the two factor model is successful in explaining the cross sectional variation in the asset return for the period of 1964 to

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