Chapter 23 - Illiquidity as an Investment Style During the Financial Crisis in the United Kingdom

Abstract

Due to the financial crisis, illiquidity has gained importance and it is believed that it should be given equal standing with other widely known investment styles, such as value, growth, and momentum. We apply Ibbotson et al. (2013) framework on the UK market using precrisis and postcrisis data. Our results show that illiquidity can be a reliable investment style for the 7 years precrisis period. Although it is profitable postcrisis, results are less convincing. Nonetheless, illiquidity portfolios are found to be more stable postcrisis, signifying investors’ preference for illiquidity based portfolios as well as profit opportunities with lower transaction costs. Nevertheless, unlike Ibbotson et al. (2013) in their US study, illiquidity is found to be strongly correlated to size for both periods.