Research On The Liquidity And Portfolio Investment Management Of Stocks

In the traditional mean-variance model, the assumption of―The market liquidity if sufficient‖leads investors to ignore the importance of liquidity in the portfolio management. As one of three attributes of financial products, liquidity reflects and effects on the whole process of portfolio investment management. The paper tried to introduce the effect of liquidity to the optimal portfolio construction process under the traditional mean-variance model, and explored the portfolio choice thought from two dimensions to three dimensions for new viewpoint, enriched the modern portfolio management. The outline of this paper toward liquidity and portfolio investment, from exploring the stock character of liquidity to used liquidity to construct portfolio, from the theory and empirical point of view to research the effect of liquidity in the portfolio management. The main contents and conclusions as follows:First, understand the stock character of liquidity (for the objectives of portfolio choice). On the recognized of essence of liquidity, we thought the essence of liquidity was the multual-convert ability between stock and cash, and liquidity was satisfied for the normal trading demand of investors. We explored:(1)the multi-relationship among liquidity, company size and trade dollar, and used stock market data of China to give empirical analysis, the results showed: under certain company size, if the stock could afford higher trading dollar, the better liquidity; and under certain trading dollar, the larger of the company size, the better liquidity.(2)the relationship between stock price and liquidity ,the empirical results showed that: the higher the stock price, the better liquidity.(3) the stability of liquidity, the results showed that, when the market was at increasing or decreasing conditions, the liquidity was stable, but if the market was violate at volatility stage, the liquidity was not stable ,but in the medium and long-term, liquidity had stability character, furthermore, we used the mean-reverse model to robust test the stability character of liquidity . Second, introduce liquidity into portfolio management (for the construction of portfolio). The paper main discussed :(1)the numbers of stock in one portfolio. Based on the essence of liquidity, the more diversify, the better liquidity, but the investors had no continuously or simultaneously demand stocks generally, so it was not necessary for over-diversify. From the diversify the risk, we used the continuously T test, estimate the proper numbers of stock in one portfolio scientific; (2) based on the essence of liquidity, from the ex ante and ex post to recognize liquidity, we discussed the methods of introducing liquidity into mean-variance models, which included: from the theory point, we considered one-period investment, the final effect of liquidity to portfolio investment was executing cost, assumed the maximization the expected utility of end wealth, we discussed the function relation among liquidity, liquidity risk and expected utility of end-period wealth, and discussed the results when introduced the liquidity into the expected utility of end-period wealth, the results showed that: considering liquidity may not reduce the expected utility of end-period wealth. From the empirical point, we introduced the liquidity to mean-variance model indirectly and directly. Under the indirectly method, the paper constructed a liquidity adjustment coefficient, used the return after liquidity adjustment to construct optimal portfolio under the mean-variance model; under the directly method, the main point was considering the demand of portfolio re-balance, we used liquidity-filter, liquidity constraint and the maximization utility under taking the liquidity into account to introduce liquidity into mean-variance model directly, the paper gave the efficient solution sets of the three models, and checked efficient frontier was surface when return, risk and liquidity reached equilibrium; (3)from the practical investment point, we considered the liquidity-mean-variance model under investment policies constraint and industry constraint.Third, portfolio investment management under liquidity effect ( for the management process and results of portfolio). Based on the empirical model under liquidity, we gave empirical analysis of the efficient frontier of portfolio by indirectly and directly method. The main contents included: from indirectly point, we chose the top 10 largest market value listed companies, compared the efficient frontier under or with no considering the liquidity effect, the results showed that after the liquidity adjustment, the efficient frontier moved to left-top, this meaned the investors could get return under bearing lower risk, meanwhile, the investors could get higher return under certain risk with the liquidity effect. From the directly point, we chose the composite stocks of Shanghai 50 index as higher liquidity group, and chose the same numbers of stock which never was Shanghai 50 index randomly as lower liquidity group, the stocks in both higher and lower liquidity groups constructed medium liquidity group. We used the liquidity-filter, liquidity constraint and the maximization utility under taking the liquidity into account to analyze the effect of liquidity on portfolio choice, the main results included: under the liquidity filter model, the results showed to allocate high and low liquidity stocks in portfolio could get higher return than only high or low liquidity stocks portfolio under some certain risk level, this reflected the effect of liquidity in the asset allocation strategies choice. Under liquidity constraint, the results showed that under the some certain liquidity constraint, the returns of the optimal portfolios will increase as the risk, but the sharpe ratio change V character as the risk increase. Under the some certain risk level, the return and sharpe ratio was V character as the liquidity constraint increase, but changer irregularly, although the return of high and medium portfolio decrease as the liquidity constraint increase, for low portfolio, when suffering different liquidity constraints, it could not get high return even suffering higher risk. Meanwhile, under certain risk levels, the change of sharpe ratio showed that under the different liquidity constraint levels, the higer risk portfolio may not get the higher sharpe ratios. Under the maximization expected utility with liquidity preference, the results showed that the change of sharpe ratios of high and low portfolio had the some direction, but under certain risk aversion and liquidity preference, the return, risk and illiquidity still had large differences. This may because the high and low liquidity stocks have systematic differences at liquidity levels and risk levels.Fourth, liquidity, industry effect and portfolio(for the appliance of portfolio). The paper analyzed the difference of industries by analyzing the correlation coefficients and difference of return and liquidity among different industries, the results showed that industry effect was significant in the stock market of China. By statistic analysis the industries allocation concentration and comparison between the industries allocation of funds and the industries market value percentage structure of the market, the statistic results showed that the industries concentration ratio was about 50%, the industries preference were different among funds, and the industries allocation of fund were over-allocation in mining industry, finance-insurance industry, culture industry and comprehensive industry. Furthermore, we analyze the relationship among liquidity, industry effect and portfolio, compared the influence of investment polices constraint of industry allocation to portfolio, the results showed that: without investment policies would lead to industries concentration risk. Finanlly, we used the portfolio of one open-end fund in China stock market, empirical analyzed the optimal solution under liquidity constraint, investment polices constraint and industry allocation constraint, the results showed that the risk and return first decrease then increase as the increase of illiquidity, but the return per risk will first increase then decrease as the increase of illiquidity, this means when the illiquidity in the portfolio was higher, the risk of portfolio would accelerate the deterioration and led to the decrease of return per risk.