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Market downturns, zero investment strategies and systematic liquidity risk

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  • Butt, Hilal Anwar
  • Virk, Nader Shahzad

Abstract

We analyse the behaviour of returns of various zero-investment (ZI) strategies motivated by the well-reported return crashes witnessed for momentum anomaly in down market states (DMS). We find that momentum crashes during market downturns are not unique. Instead, our results show that an alternating return generating process is at work across ZI strategies: almost half of ZI strategies exhibit momentum-like tendencies while the remainder displays an opposite pattern. In sum, this design is linked to the sign of systematic liquidity beta and the strength of falls/rises depend on the illiquidity gaps between the long and short portfolios of studied ZIS.

Suggested Citation

  • Butt, Hilal Anwar & Virk, Nader Shahzad, 2019. "Market downturns, zero investment strategies and systematic liquidity risk," Finance Research Letters, Elsevier, vol. 28(C), pages 246-253.
    • Handle: RePEc:eee:finlet:v:28:y:2019:i:c:p:246-253
    DOI: 10.1016/j.frl.2018.05.010
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    1. Hilal Anwar Butt & Nader Shahzad Virk, 2022. "Momentum crashes and variations to market liquidity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1899-1911, April.

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    More about this item

    Keywords

    Momentum crashes; Market downturns; Zero-investment strategies; Systematic liquidity beta; Illiquidity gaps;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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