Author: Szymon Stereńczak Publisher: ISBN: Category : Languages : en Pages : 32
Book Description
This paper provides a model which helps explain the variability of stock liquidity premium. I model liquidity as a time-varying price impact and include both permanent as well as temporary price impact. Liquidity premium is defined as an additional return that stock should yield to compensate an investor for the loss of wealth utility caused by price impact costs. I find that liquidity premium varies with the expected net stock return, return volatility and, to a lesser extent, with the returns on risk-free bonds. I also conclude that the liquidity premium arises mainly as a result of the effect of temporary price impact. The “Per unit liquidity premium” associated with temporary price impact is more than 2 times higher than that associated with the permanent one.
Author: Harold H. Zhang Publisher: ISBN: Category : Languages : en Pages : 80
Book Description
This paper offers a rational explanation for the puzzling empirical fact that stock returns decrease in the volatility of liquidity. We model liquidity as a stochastic price impact process and define the liquidity premium as the additional return necessary to compensate a multi-period investor for the adverse price impact of trading. The model demonstrates that a fully rational, utility maximizing, risk averse investor can take advantage of time-varying liquidity by adapting his trades to the state of liquidity. A higher volatility in liquidity offers more opportunity for the investor to time his trades and is therefore associated with a lower required liquidity premium. We provide empirical evidence consistent with the model. First, we document a cross sectional negative relation between stock returns and the volatility of liquidity measured by price impact. Second, we find a time series causality relation from price impact to trading activity.
Author: Thierry Foucault Publisher: Oxford University Press ISBN: 0197542069 Category : Capital market Languages : en Pages : 531
Book Description
"The process by which securities are traded is very different from the idealized picture of a frictionless and self-equilibrating market offered by the typical finance textbook. This book offers a more accurate and authoritative take on this process. The book starts from the assumption that not everyone is present at all times simultaneously on the market, and that participants have quite diverse information about the security's fundamentals. As a result, the order flow is a complex mix of information and noise, and a consensus price only emerges gradually over time as the trading process evolves and the participants interpret the actions of other traders. Thus, a security's actual transaction price may deviate from its fundamental value, as it would be assessed by a fully informed set of investors. The book takes these deviations seriously, and explains why and how they emerge in the trading process and are eventually eliminated. The authors draw on a vast body of theoretical insights and empirical findings on security price formation that have come to form a well-defined field within financial economics known as "market microstructure." Focusing on liquidity and price discovery, the book analyzes the tension between the two, pointing out that when price-relevant information reaches the market through trading pressure rather than through a public announcement, liquidity may suffer. It also confronts many striking phenomena in securities markets and uses the analytical tools and empirical methods of market microstructure to understand them. These include issues such as why liquidity changes over time and differs across securities, why large trades move prices up or down, and why these price changes are subsequently reversed, and why we observe temporary deviations from asset fair values"--
Author: Angelika Esser Publisher: ISBN: Category : Languages : en Pages : 23
Book Description
This paper investigates the interactions between stock price movements, the trading strategies of a large trader, and liquidity. Our framework generalizes the model of Frey by introducing a stochastic liquidity factor. We derive a formula for the feedback effect of the large investor's trading strategy and examine the feedback effects on stock prices for positive and contrarian trading strategies. Features of our model are illustrated using Monte Carlo simulation. The main contribution of this paper is the examination of the price process in an economy with stochastic liquidity, such that liquidity shocks can be captured and their consequences can be analyzed. We observe significant liquidity feedback effects on both the price process of the underlying and the trading strategy of the large investor.
Author: Yakov Amihud Publisher: Now Publishers Inc ISBN: 1933019123 Category : Business & Economics Languages : en Pages : 109
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: Angelika Esser Publisher: ISBN: Category : Languages : en Pages : 23
Book Description
We model the interactions between the trading activities of a large investor, the stock price and the market liquidity. Our framework generalizes the model of Frey (2000), where liquidity is constant by introducing a stochastic liquidity factor. This innovation has two implications. First, we can analyse trading strategies for the large investor that are affected by a changing market depth. Second, the sensitivity of stock process to the trading strategy of the large investor can vary due to changes in liquidity. Features of our model are demonstrated using Monte Carlo simulation for different scenarios. The flexibility of our framework is illustrated by an application that deals with the pricing of a liquidity derivative. The claim under consideration compensates a large investor who follows a stop loss strategy for the liquidity risk that is associated with a stop loss order. The derivative matures when the asset price falls below a stop loss limit for the first time and then pays the price difference between the asset price immediately before and after the execution of the stop loss order. The setup to price the liquidity derivative is calibrated for one example using real world limit order book data so that one gets an impression about the order of magnitude of the liquidity effect.
Author: Joost Driessen Publisher: ISBN: Category : Languages : en Pages : 53
Book Description
Recent empirical work documents large liquidity risk premiums in stock markets. We calculate the liquidity risk premiums demanded by large investors by solving a dynamic portfolio choice problem with stochastic price impact of trading, CRRA utility and a time-varying investment opportunity set. We find that, even with high trading-cost rates and substantial trading motives, the theoretically demanded liquidity risk premium is negligible, less than 3 basis points per year. Assuming forced selling during market downturn enlarges the liquidity risk premium to maximally 20 basis points per year, which is well below existing empirical estimates of the liquidity risk premium.
Author: Waldemar Tarczyński Publisher: Springer ISBN: 3030212742 Category : Business & Economics Languages : en Pages : 510
Book Description
This proceedings volume presents current research and innovative solutions into capital markets, particularly in Poland. Featuring contributions presented at the 10th Capital Market Effective Investments (CMEI 2018) conference held in Międzyzdroje, Poland, this book explores the future of capital markets in Poland as well as comparing it with the capital markets of other developed regions around the world. Divided into four parts, the enclosed papers provide a background into the theoretical foundations of capital market investments, explores different approaches—both classical and contemporary—to investment decision making, analyzes the behaviors of investors using experimental economics and behavioral finance, and explores practical issues related to financial market investments, including real case studies. In addition, each part of the book begins with an introductory chapter written by thematic editors that provides an outline of the subject area and a summary of the papers presented.
Author: Dimitri Vayanos Publisher: Now Pub ISBN: 9781601985989 Category : Business & Economics Languages : en Pages : 112
Book Description
Theories of Liquidity surveys the theoretical literature on market liquidity focusing on six main imperfections studied in that literature: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search. The authors address three basic questions in the context of each imperfection: (a) how to measure illiquidity, i.e., the lack of liquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. The theoretical literature on market liquidity often employs different modeling assumptions when studying different imperfections. Instead of surveying this literature in a descriptive manner, Theories of Liquidity uses a common, unified model to study all six imperfections that are considered, and for each imperfection addresses the three basic questions within that model. The model generates many of the key results shown in the literature. It also serves as a point of reference for surveying other results derived in different or more complicated settings, and for describing fruitful areas for future research.This survey is related to both market microstructure and asset pricing. It emphasizes fundamental market imperfections covered in the market microstructure literature, and examines how these relate to empirical measures of illiquidity used in that literature. It also examines how market imperfections affect expected asset returns - an asset-pricing exercise - and, in that sense, connects the two areas of research.
Author: Yakov Amihud Publisher: Beard Books ISBN: 1587981637 Category : Business & Economics Languages : en Pages : 338
Book Description
This is a reprnit of a previously published book. it deals with changes on the U.S. financial market by the Securities Acts Amendment of 1975.
Author: Szymon Stereńczak
Author: Harold H. Zhang
Author: Thierry Foucault
Author: Angelika Esser
Author: Yakov Amihud
Author: Angelika Esser
Author: Joost Driessen
Author: Waldemar Tarczyński
Author: Dimitri Vayanos
Author: Yakov Amihud