Really good questions, and I appreciate you reading.
1) The universe includes stocks with a primary listing on U.S. or Canadian exchanges only. ADRs and other foreign primary listings are excluded from this test. I don’t always exclude them when generating actionable lists, but I do penalize them with a factor in the ranking system.
2) The test used monthly rebalancing, but the same pattern holds across different rebalance periods, including quarterly and annual. While individual events like uplistings can impact outcomes for specific stocks, they don’t drive the overall result. The relationship between liquidity and return potential holds up regardless of timing. That pattern also appears even within more constrained universes. If I isolate OTC stocks only or exclude them entirely, lower liquidity still aligns with higher backtested returns with roughly the same proportional difference. The same relationship shows up across nationally listed exchanges as well.
1) Out of curiosity: Are international secondary listings included in the liquidity constraints? I assume not, but wanted to confirm.
2) How often do you rebalance? I ask because I wonder about liquidity-increasing events between rebalances, e.g. an uplisting from OTC to NASDAQ. I would assume this boosts the early bird, and then after rebalancing (and with increased liquidity), maybe the 'boost' is gone.
Really good questions, and I appreciate you reading.
1) The universe includes stocks with a primary listing on U.S. or Canadian exchanges only. ADRs and other foreign primary listings are excluded from this test. I don’t always exclude them when generating actionable lists, but I do penalize them with a factor in the ranking system.
2) The test used monthly rebalancing, but the same pattern holds across different rebalance periods, including quarterly and annual. While individual events like uplistings can impact outcomes for specific stocks, they don’t drive the overall result. The relationship between liquidity and return potential holds up regardless of timing. That pattern also appears even within more constrained universes. If I isolate OTC stocks only or exclude them entirely, lower liquidity still aligns with higher backtested returns with roughly the same proportional difference. The same relationship shows up across nationally listed exchanges as well.
Very very interesting, thank you for that.
I have two questions:
1) Out of curiosity: Are international secondary listings included in the liquidity constraints? I assume not, but wanted to confirm.
2) How often do you rebalance? I ask because I wonder about liquidity-increasing events between rebalances, e.g. an uplisting from OTC to NASDAQ. I would assume this boosts the early bird, and then after rebalancing (and with increased liquidity), maybe the 'boost' is gone.
Cheers