Momentum effect and liquidity

This paper investigates the role of firm-specific and market-wide liquidity in affecting the momentum effect. It shows that the momentum effect significantly exists and robust concerning the pricing factors and liquidity variables. Losers (winners) express pronounced liquidity effects that the higher the past turnover, the lower the present performance. The existence of momentum spread between high turnover firms and low turnover firms cannot be interpreted by the liquidity effect but by the neglect (glamour) effect. The winner (loser) return has a positive (negative) regression loading on the lagged market-wide liquidity variable, implying that market liquidity is an indicator of overconfidence and a generator of expectation self-fulfilling effect.