Characteristic Liquidity, Systematic Liquidity and Expected Returns PDF Download

Author: Reza Bradrania
Publisher:
ISBN:
Category :
Languages : en
Pages : 43

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Book Description
We investigate whether the effect of liquidity on equity returns can be attributed to the liquidity level, as a stock characteristic, or a market wide systematic liquidity risk. We develop a CAPM liquidity-augmented risk model and test the characteristic hypothesis against the systematic risk hypothesis for the liquidity effect. We find that the two-factor systematic risk model explains the liquidity premium, and the null hypothesis that the liquidity characteristic is compensated irrespective of liquidity risk loadings is rejected. This result is robust over 1931-2008 data and sub-samples of pre-1963 and post-1963 data both in the time-series and the cross-sectional analysis.

Author: N. Cakici
Publisher: Springer
ISBN: 1137359072
Category : Business & Economics
Languages : en
Pages : 347

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Book Description
Risk and Return in Asian Emerging Markets offers readers a firm insight into the risk and return characteristics of leading Asian emerging market participants by comparing and contrasting behavioral model variables with predictive forecasting methods.

Author: Evangelos Giouvris
Publisher:
ISBN:
Category :
Languages : en
Pages : 42

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Book Description
Amihud amp; Mendelson (1986), Eleswarapu amp; Reinganum (1993), Brennan amp; Subrahmanyam (1996), Datar et al (1998) and Amihud (2002) have argued that predictable differences in liquidity lead to cross-sectional differences in expected returns. A natural extension of this argument is that if liquidity is random and covaries across stocks as documented by Chordia et al (2000) and Huberman amp; Halka (2001) then a stock's sensitivity to systematic liquidity randomness could potentially play the role of a priced risk factor. Decline in systematic liquidity has been blamed for the crash of October 1987 and the global bond market liquidity crisis the summer of 1998. This study aspires to cover the absence of research in the area of systematic liquidity and its effect on expected returns under normal trading conditions for the UK market employing FTSE100 as its sample. I use daily data from October 1996 to May 2001 incorporating four different trading/price reporting regimes and find that i) liquidity proxied by absolute and proportional bid-ask spread has decreased over the years despite attempts of the London Stock Exchange to make the UK market a more competitive market ii) absolute and proportional spread exhibit a systematic time-varying component even after controlling for a number of variables known to affect spread and iii) systematic liquidity appears to have an important role on stock pricing before the introduction of SETS (order-driven stock exchange electronic trading service) but reduces for the rest of the periods/trading regimes examined. To sum up the role of commonality in liquidity is quite important under normal trading conditions and inventors require compensation for shocks in systematic liquidity.

Author: Ferhat Akbas
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
The pricing of total liquidity risk is studied in the cross-section of stock returns. The study suggests that there is a positive relation between total volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002) and its volatility is measured using daily data. Furthermore, we document that total volatility of liquidity is priced in the presence of systematic liquidity risk: the covariance of stock returns with aggregate liquidity, the covariance of stock liquidity with aggregate liquidity, and the covariance of stock liquidity with the market return. The separate pricing of total volatility of liquidity indicates that idiosyncratic liquidity risk is important in the cross section of returns. This result is puzzling in light of Acharya and Pedersen (2005) who develop a model in which only systematic liquidity risk affects returns. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a risk premium for holding stocks that have high variation in liquidity. Higher variation in liquidity implies that a stock may become illiquid with higher probability at a time when it is traded. This is important for investors who face an immediate liquidity need and are not able to wait for periods of high liquidity to sell. The electronic version of this dissertation is accessible from http://hdl.handle.net/1969.1/150946

Author: Andreas Jobst
Publisher: International Monetary Fund
ISBN: 1475505590
Category : Business & Economics
Languages : en
Pages : 70

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Book Description
Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

Author: Yakov Amihud
Publisher: Now Publishers Inc
ISBN: 1933019123
Category : Business & Economics
Languages : en
Pages : 109

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Book Description
Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.

Author: Yakov Amihud
Publisher: Cambridge University Press
ISBN: 1139560158
Category : Business & Economics
Languages : en
Pages : 293

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Book Description
This book presents the theory and evidence on the effect of market liquidity and liquidity risk on asset prices and on overall securities market performance. Illiquidity means incurring a high transaction cost, which includes a large price impact when trading and facing a long time to unload a large position. Liquidity risk is higher if a security becomes more illiquid when it needs to be traded in the future, which will raise trading cost. The book shows that higher illiquidity and greater liquidity risk reduce securities prices and raise the expected return that investors require as compensation. Aggregate market liquidity is linked to funding liquidity, which affects the provision of liquidity services. When these become constrained, there is a liquidity crisis which leads to downward price and liquidity spiral. Overall, the volume demonstrates the important role of liquidity in asset pricing.

Author: Yakov Amihud
Publisher:
ISBN:
Category :
Languages : en
Pages : 20

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Book Description
This paper reviews research on the effects of different measures of liquidity on asset prices. The foundation is the pricing of liquidity as an asset characteristic that began with the theoretical model and empirical evidence of Amihud and Mendelson (1986). The positive relation between expected returns on financial assets and the illiquidity of these assets has since been reconfirmed both in the U.S. and worldwide. The positive relation between illiquidity and expected return gives rise to research on the effect of liquidity-related systematic risk. Two types of such risk are shown to be priced: exposure to shocks in market liquidity and exposure to the market illiquidity return premium. The pricing of these risks is stronger in times of greater funding illiquidity and economic stress.

Author: Azi Ben-Rephael
Publisher:
ISBN:
Category :
Languages : en
Pages : 60

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Book Description
Stock liquidity has improved over the recent four decades. This improvement was accompanied by a dramatic increase in trading activity. The net effect on the liquidity premium is ambiguous. We show that the characteristic liquidity premium of U.S. stocks has significantly declined over the past four decades. In recent time periods characteristic liquidity is significantly priced only for the smallest common stocks. This decline stems from an improvement in liquidity, and from a lower sensitivity of expected returns to liquidity. By contrast, systematic liquidity has not been trending down, and is still significantly priced primarily among NASDAQ stocks.

Author: Bengt Holmstrom
Publisher: MIT Press
ISBN: 0262518538
Category : Business & Economics
Languages : en
Pages : 263

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Book Description
Two leading economists develop a theory explaining the demand for and supply of liquid assets. Why do financial institutions, industrial companies, and households hold low-yielding money balances, Treasury bills, and other liquid assets? When and to what extent can the state and international financial markets make up for a shortage of liquid assets, allowing agents to save and share risk more effectively? These questions are at the center of all financial crises, including the current global one. In Inside and Outside Liquidity, leading economists Bengt Holmström and Jean Tirole offer an original, unified perspective on these questions. In a slight, but important, departure from the standard theory of finance, they show how imperfect pledgeability of corporate income leads to a demand for as well as a shortage of liquidity with interesting implications for the pricing of assets, investment decisions, and liquidity management. The government has an active role to play in improving risk-sharing between consumers with limited commitment power and firms dealing with the high costs of potential liquidity shortages. In this perspective, private risk-sharing is always imperfect and may lead to financial crises that can be alleviated through government interventions.