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Essays On The Risks And Returns Of Illiquid Assets
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Book Synopsis Essays on the Risks and Returns of Illiquid Assets by : Spencer Couts
Download or read book Essays on the Risks and Returns of Illiquid Assets written by Spencer Couts and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters that aim to understand the risks and returns of funds that invest in illiquid assets.
Book Synopsis Investment Decisions on Illiquid Assets by : Jaroslaw Morawski
Download or read book Investment Decisions on Illiquid Assets written by Jaroslaw Morawski and published by Springer Science & Business Media. This book was released on 2009-02-14 with total page 467 pages. Available in PDF, EPUB and Kindle. Book excerpt: Jaroslaw Morawski offers a practicable and theoretically well-founded solution to the problems encountered when investing in illiquid assets and develops a model of the liquidation process for this category of investments. The result is a coherent investment decision framework designed specifically for private real estate but applicable also to other illiquid assets.
Book Synopsis Mastering Illiquidity by : Thomas Meyer
Download or read book Mastering Illiquidity written by Thomas Meyer and published by John Wiley & Sons. This book was released on 2013-04-18 with total page 309 pages. Available in PDF, EPUB and Kindle. Book excerpt: Arms investors with powerful new tools for measuring and managing the risks associated with the various illiquid asset classes With risk-free interest rates and risk premiums at record lows, many investors are turning to illiquid assets, such as real estate, private equity, infrastructure and timber, in search of superior returns and greater portfolio diversity. But as many analysts, investors and wealth managers are discovering, such investments bring with them a unique set of risks that cannot be measured by standard asset allocation models. Written by a dream team of globally renowned experts in the field, this book provides a clear, accessible overview of illiquid fund investments, focusing on what the main risks of these asset classes are and how to measure those risks in today's regulatory environment. Provides solutions for institutional investors in need of guidance in today's regulatory environment Offers detailed descriptions of risk measurement in illiquid asset classes, illustrated with real life case studies Helps you to develop reliable risk management tools while complying with the regulations designed to contain the individual and systemic risks arising from illiquid investments Features real-life case studies that capture an array of risk management scenarios you are likely to encounter
Book Synopsis Two Essays on the Impact of Idiosyncratic Risk on Asset Returns by : Jie Cao
Download or read book Two Essays on the Impact of Idiosyncratic Risk on Asset Returns written by Jie Cao and published by . This book was released on 2009 with total page 232 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this dissertation, I explore the impact of idiosyncratic risk on asset returns. The first essay examines how idiosyncratic risk affects the cross-section of stock returns. I use an exponential GARCH model to forecast expected idiosyncratic volatility and employ a combination of the size effect, value premium, return momentum and short-term reversal to measure relative mispricing. I find that stock returns monotonically increase in idiosyncratic risk for relatively undervalued stocks and monotonically decrease in idiosyncratic risk for relatively overvalued stocks. This phenomenon is robust to various subsamples and industries, and cannot be explained by risk factors or firm characteristics. Further, transaction costs, short-sale constraints and information uncertainty cannot account for the role of idiosyncratic risk. Overall, these findings are consistent with the limits of arbitrage arguments and demonstrate the importance of idiosyncratic risk as an arbitrage cost. The second essay studies the cross-sectional determinants of delta-hedged stock option returns with an emphasis on the pricing of volatility risk. We find that the average delta-hedged option returns are significantly negative for most stocks, and they decrease monotonically with both total and idiosyncratic volatility of the underlying stock. Our results are robust and cannot be explained by the Fama-French factors, market volatility risk, jump risk, or the effect of past stock return and volatility-related option mispricing. Our results strongly support a negative market price of volatility risk specification that is proportional to the volatility level. Reflecting this volatility risk premium, writing covered calls on high volatility stocks on average earns about 2% more per month than selling covered calls on low volatility stocks. This spread is higher when it is more difficult to arbitrage between stock and option.
Book Synopsis Three Essays in Asset Management by : Alina Roşu
Download or read book Three Essays in Asset Management written by Alina Roşu and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays on Liquidity Risk and Asses Pricing by : Ning Chen (Ph.D.)
Download or read book Essays on Liquidity Risk and Asses Pricing written by Ning Chen (Ph.D.) and published by . This book was released on 2005 with total page 268 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Three Essays on Liquidity Shocks and Their Implication for Asset Pricing and Valuation Models by : Nardos M. Beyene
Download or read book Three Essays on Liquidity Shocks and Their Implication for Asset Pricing and Valuation Models written by Nardos M. Beyene and published by . This book was released on 2019 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: The main objective of my three essays is to incorporate liquidity shocks and the linkages between the liquidity condition of financial markets into asset pricing and valuation models. The first essay focuses on the liquidity adjusted capital asset pricing model, while the second and the third essays examine the popular asset valuation model called the Fed model. The first essay investigates the pricing of the commonality risk in the U.S. stock market by using a more comprehensive market illiquidity measure that can reflect the liquidity condition of different asset markets. This measure is given by the yield difference between commercial paper and treasury bill. In addition, consistent with the definition of commonality risk, I form portfolios based on the sensitivity of each stock's illiquidity to the market-wide illiquidity. Using monthly data from January 1997 to December 2016 and the conditional version of the Liquidity-adjusted Capital Asset Pricing Model (LCAPM) estimated by the Dynamic Conditional Correlation approach, I find a significant commonality risk premium of 0.022% and 0.014% per year for 12-month and 24-month holding periods, respectively. This premium estimate is significantly higher than those found using the market illiquidity measure and estimation procedures from previous studies. These findings provide evidence that a security's easiness in terms of tradability at times of liquidity dry up is extremely important. It is also higher than the excess return associated with other forms of liquidity risk. In addition, the paper finds a variation in the estimated commonality risk premium over time, with values being higher during periods of market turmoil. Moreover, estimating the LCAPM with the yield difference between commercial paper and treasury bill as a measure of market illiquidity performs better in predicting returns for the low commonality risk portfolios. The second essay examines the inflation illusion hypothesis in explaining the high correlation between government bond yield and stock yield as implied by the Fed model. According to the inflation illusion hypothesis, there is mis-pricing in the stock market due to the failure of investors to adjust their cash flow expectation to inflation. This led to a co-movement in stock yield and government bond yield. I use the Gordon Growth model to determine the mis-pricing component in the stock market. In the next step, the correlation between bond yield and stock yield is estimated using the Asymmetric Generalized Dynamic Conditional Correlation (AG-DCC) model. Finally, I regress this correlation on mis-pricing and two other control variables, GDP and inflation. I use monthly data from January 1983 to December 2016. Consistent with the Fed model, the paper finds a significant positive correlation between the yield on government bonds and stock yield, with an average correlation of 0.942 - 0.997. However, in contrast to the inflation illusion hypothesis, mis-pricing in the stock market has an insignificant impact on this correlation. The third essay provides liquidity shocks contagion between the stock market and the corporate bond market as the driving force behind the high correlation between the yield on stocks and the yield on government bonds as implied by the Fed model. The idea is that when liquidity drops in the stock market, firms' credit risk rises because the deterioration in the liquidity of equities traded in the stock market increases the firms' default probability. Consequently, investors' preferences shift away from corporate bonds to government bonds. Higher demand for government bonds keeps their yield low, leading to a co-movement of government bond yield and stock yield. In order to test this liquidity-based explanation, the paper first examines the interdependence between liquidity in the stock and corporate bond markets using the Markov switching model, and a time series non-parametric technique called the Convergent Cross Mapping (CCM). In order to see the response of government bond yield and stock yield to liquidity shocks in the stock market, the study implements an Auto Regressive Distributed Lag (ARDL) model. Using monthly data from January 1997 to December 2016, the paper presents strong evidence of liquidity shocks transmission form the stock market to the corporate bond market. Furthermore, liquidity shocks in the stock market are found to have a significant impact on the stock yield. These findings support the illiquidity contagion explanation provided in this paper.
Book Synopsis Essays on Margin Requirements, Endogenous Illiquidity, and Portfolio Choice by : Yajun Wang
Download or read book Essays on Margin Requirements, Endogenous Illiquidity, and Portfolio Choice written by Yajun Wang and published by . This book was released on 2011 with total page 176 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation includes three essays. The first essay studies the effects of margin requirements. The second essay studies how asymmetric information and imperfect competition affect equilibrium illiquidity. The third essay derives new comparative statics results for the distribution of portfolio payoffs. Margin requirements have long been implemented in almost all financial markets and are often used as an important regulatory tool for improving market conditions. However, their economic impact beyond affecting default risk is still largely unknown. The first essay proposes a tractable and flexible equilibrium model with and without information asymmetry to examine how margin requirements on both long and short stock positions affect asset prices, market volatility, market illiquidity and the welfare of market participants. Most of my main results are obtained in closed-form. Contrary to one of the main regulatory goals, I find that margin requirements can significantly emph{increase} market volatility. In addition, margin requirements always increase market illiquidity (as measured by price impact) and can lead to a greater return reversal exactly when they amplify market volatility. I also find that information asymmetry may reverse or dampen the impact of margin requirements. Moreover, margin requirements always make unconstrained investors worse off and can make constrained investors better off. The model provides new testable implications. The second essay proposes a novel and tractable equilibrium model to study how information asymmetry, competition among market makers, and investors' risk aversion affect asset pricing, market illiquidity and welfare. The main innovation is that market makers compete through choosing simultaneously quantities to buy at the bid and to sell at the ask and accordingly market clears separately at the bid and at the ask. Equilibrium bid and ask prices, bid and ask depths, trading volume and market makers' inventory levels are all derived in closed-form. Our model can help explain some of the puzzling empirical findings, such as bid-ask spreads can be lower with asymmetric information and can be positively correlated with trading volume. In addition, we find that information asymmetry may make informed investors worse off, may reduce the welfare loss due to market power and may increase the competition among market makers in equilibrium. Hart (1975) proved the difficulty of deriving general comparative statics in portfolio weights. Instead, in the third essay, we derive new comparative statics for the distribution of payoffs: A is less risk averse than B iff A's payoff is always distributed as B's payoff plus a non-negative random variable plus conditional-mean-zero noise. If either agent has nonincreasing absolute risk aversion, the non-negative part can be chosen to be constant. The main result also holds in some incomplete markets with two assets or two-fund separation, and in multiple periods for a mixture of payoff distributions over time (but not at every point in time).
Book Synopsis Three Essays in Investments by : Hunter Matthew Holzhauer
Download or read book Three Essays in Investments written by Hunter Matthew Holzhauer and published by . This book was released on 2010 with total page 112 pages. Available in PDF, EPUB and Kindle. Book excerpt: Since the recession of 2008, many financial advisors and investors have begun to take a closer look at the holdings within their respective portfolios. These holdings are a two-fold reflection of risk and return. First, they are a signal as to the amount of risk a client or investor has chosen to tolerate. Second, they are an indication as to the type of financial instruments or products the client or investor has chosen to seek their return objectives. This study addresses this balance between risk and return with papers addressing both sides of this scale. The first paper concentrates on developing a more valid and reliable financial risk tolerance (FRT) questionnaire. Specifically, we use factor analysis and find five factors for measuring FRT. Our results have obvious uses for financial planning, particularly portfolio allocation. The second and third paper address the effects of expected market volatility on a not well understood group of relatively new financial instruments called leveraged and inverse exchange traded funds (ETFs). The second paper specifically looks at the daily returns of these specific ETFs and finds that expected market volatility and the daily change in expected market volatility have significant effects on daily returns. The third paper examines long-term holding strategies for these specific ETFs and finds that expected market volatility has a significant effect on long-term returns. These results suggest that volatility indexes may be used to devise trading rules for these specific ETFs. In the end, the results of these three papers accomplished the goal of this research as a whole, which was to better equip advisors and investors with the tools and information needed to balance the risk and return within their respective portfolios.
Book Synopsis Essays on Search Frictions in Financial Markets by : Semih Uslu
Download or read book Essays on Search Frictions in Financial Markets written by Semih Uslu and published by . This book was released on 2016 with total page 186 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters about search frictions in financial markets. Chapter 1: "Pricing and Liquidity in Decentralized Asset Markets" I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. I also calibrate the model, demonstrate that it produces realistic quantitative outcomes, and use it to study the effect of trading frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule. Chapter 2: "Price Dispersion and Trading Activity during Turbulent Times" I construct a dynamic model of crises in a decentralized asset market that operates via search and bargaining. The crisis is modeled as a one-time aggregate shock to uncertainty with a random recovery. The arrival of the crisis shock leads to an increase in both the volatility of asset payoff and the volatility of investors' background risk. The equilibrium path for investors' valuations, terms of trade, and the distribution of investors' positions is characterized in closed form both during the crisis and during the recovery. Tractability of the model allows me to derive natural proxies for price dispersion and trading activity. I show that both volatility of asset payoff and volatility of background risk contribute to higher level of price dispersion during the crisis. Trading activity might be higher or lower depending on the increase in the volatility of background risk relative to the increase in the volatility of asset payoff, consistent with the "flight-to-quality" observations during extreme episodes. A flight to the asset market always starts with a "heating-up" in trading activity but a flight from the market might start with a dry-up or heating-up during the onset of the crisis. If the relative increase in the volatility of asset payoff is too high, a period of fire sales is triggered leading to a short heating-up before the complete dry-up of the trading activity. I calibrate the model according to the U.S. corporate bond market data and show that it captures the observations during the subprime crisis. Chapter 3: "Endogenous Liquidity and Cross-section of Returns in Dynamic Bargaining Markets" The empirical analysis of liquid/illiquid asset pairs reveals the existence of a return differential (liquidity premium) between those types of assets. The time variation in liquidity premia is delineated by the term "flight-to-liquidity," meaning that liquidity premia are higher during extreme market episodes. In this paper, I extend the search-and-bargaining model of Weill (2008) by allowing for risk aversion, to explain this observation. Risk-averse investors optimally allocate their limited budgets of search efforts to various assets. This extension allows me to examine the relationship between risk and liquidity of assets in the cross-section and over time. My model generates endogenous cross-sectional liquidity differentials corroborating much of the empirical evidence. Furthermore, I show that when asset payoffs are more volatile, trade surpluses are higher because idiosyncratic hedging quality differentials are wider. Higher trade surpluses lead to higher value of search, and in turn, higher opportunity cost of committing to a particular asset, especially to an illiquid one. Therefore, periods of high volatility are associated with a flight-to-liquidity.
Book Synopsis Three Essays on Risk, Uncertainty, and Expected Returns by : Sina Ehsani
Download or read book Three Essays on Risk, Uncertainty, and Expected Returns written by Sina Ehsani and published by . This book was released on 2015 with total page 139 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first chapter of this dissertation explores the effects of the recent rise of passive investing on the U.S. stock market. The analysis establishes a strong relation between passive investment and aggregate price dynamics such as systematic volatility, idiosyncratic volatility, and price synchronicity, suggesting that investors should consider trading activity of passive products in decision making. The second chapter examines the pricing of characteristics and betas in the cross-section of expected corporate loan returns. Despite the increasing popularity of the secondary loan market among institutional investors, this market is unexplored in the context of empirical asset pricing literature. This comprehensive study takes the first step to fill the gap by investigating the sources of risk and predictability of corporate loan returns. We find that one loan specific characteristic, momentum, and one covariance-based characteristic, default beta, explain the cross-section of loan expected returns. The final chapter first introduces a measure of model uncertainty regarding the future return distribution of the U.S. stock market and then examines the pricing of model uncertainty in the cross-section of stock returns.
Book Synopsis Illiquid Asset Investing by : Andrew Ang
Download or read book Illiquid Asset Investing written by Andrew Ang and published by . This book was released on 2013 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: After taking into account biases induced by infrequent trading and selection, it is unlikely that illiquid asset classes have higher risk-adjusted returns than traditional liquid stock and bond markets. On the other hand, there are significant illiquidity premiums within asset classes. Portfolio choice models incorporating illiquidity risk recommend only modest holdings of illiquid assets. Investors should demand high risk premiums for investing in illiquid assets.
Book Synopsis Essays Over Netwerken by : Ana Maria Babus
Download or read book Essays Over Netwerken written by Ana Maria Babus and published by Rozenberg Publishers. This book was released on 2008 with total page 135 pages. Available in PDF, EPUB and Kindle. Book excerpt: We find information through our social network. A network of banks handles our financial transactions. And when computers freeze under virus attacks, we are reminded of how pervasive networks are. This work concentrates on two topics. The first part of the thesis studies how highly unequal networks, where links are concentrated on a few key nodes, can emerge. The interest is motivated by how their structure affects their function: the spread of information and disease, for instance, may occur faster in such networks The second part of the thesis applies network theories to gain a better understanding of financial systems. We investigate the strategic motivations of banks to interact with each other when the banking system is exposed to the danger of contagion.
Book Synopsis Essays on Life Insurer Demutualizations and Diversifying Mergers and Acquisitions by :
Download or read book Essays on Life Insurer Demutualizations and Diversifying Mergers and Acquisitions written by and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: One outcome of ever increasing competition and consolidation in the financial services industries has been the declining significance of the mutual organizational form in the U.S. life insurance industry. The process of converting from a mutual to a stock company gives rise to a variety of issues. The first three essays in this dissertation focus on the growing movement toward demutualization in the U.S. life insurance industry where essay one discusses industrial organization background. In essay two, I improve on the existing literature regarding the determinants of life insurer demutualizations by investigating an expanded data set and utilizing more robust econometric techniques to allow for different forms of demutualization. I also model the demutualization process as a two step process to account for the timing of demutualization, time-varying covariates, and censoring. These models yield results that strongly support the access to capital hypothesis. In essay three, I examine changes in risk management and investment strategies of demutualizing life insurers following conversion. The empirical tests reveal that demutualizing life insurers increase total risk after conversion consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest rate risk and increasing their core-business risks as proxied by investments in various illiquid asset classes. The final essay is on diversifying mergers and acquisitions. Conventional wisdom suggests diversification reduces risk. However, the change in the riskiness of the firm after diversifying acquisitions has not been directly tested in the literature. Using a sample of diversifying M & As, I find that total firm risk does not decrease significantly after these transactions. I then show that while total firm risk does not change, core-business risk increases significantly after the diversifying M & A transactions. I also find that capital expenditures in the acquirers' core business segments increase significantly more after diversifying transactions relative to that of non-diversifying transactions. Overall, the evidence in this essay adds to the risk management literature that says hedging is a means of allocating risk rather than reducing risk and offers an alternative explanation for why firms diversify.
Book Synopsis Three Essays on Hedge Fund Fee Structure, Return Smoothing and Gross Performance by : Shuang Feng
Download or read book Three Essays on Hedge Fund Fee Structure, Return Smoothing and Gross Performance written by Shuang Feng and published by . This book was released on 2011 with total page 131 pages. Available in PDF, EPUB and Kindle. Book excerpt: Hedge funds feature special compensation structure compared to traditional investments. Previous studies mainly focus on the provisions and incentive structure of hedge fund contract, such as 2/20, hurdle rates, and high-water mark. The first essay develops an algorithm to empirically estimate the monthly fees, fund flows and gross asset values of individual hedge funds. We find that management fee is a major component in the dollar amount of hedge fund total fees, and fund flow is more important in determining the change in fund size compared to net returns, especially when fund is shrinking in size. We also find that best paid hedge funds concentrate in the largest hedge fund quintile. Large funds tend to perform better, earn more, and rely less on management fee for their managers' compensation. Further, we find that fund flow is an important determinant of hedge fund managerial incentives. Together with the "visible" hands of hedge fund management, i.e. the provisions of hedge fund incentive contracts, the "invisible" hands -- fund flows enable investors to effectively impact hedge fund managerial compensation and incentives. The second essay studies the relation between return smoothing and managerial incentives of hedge funds. We use gross returns to estimate both unconditional and conditional return smoothing models. While unconditional return smoothing is a proxy of illiquidity, conditional return smoothing is related to intentional return smoothing and may be used as a first screen for hedge fund fraud. We find that return smoothing is significantly underestimated using net returns, especially for the graveyard funds. We also find that managerial incentives are positively associated with both types of return smoothing. While managers of more illiquid funds tend to earn more incentive fees, funds featuring conditional return smoothing under-perform other funds and do not earn more incentive fees on average. Finally, we find that failed hedge funds feature more illiquidity and conditional return smoothing. The third essay explores the difference between the gross-of-fee and net-of-fee hedge fund performance, by investigating the difference in distribution, factor exposures and alphas between gross returns and net returns. We find that gross returns are distributed significantly differently from net returns. The gross-of-fee alphas are higher than the net-of-fee alphas by about 4% per year on average. We also find positive relation between hedge fund performance and fund size, fund flows, and managerial incentives, which holds for both gross-of-fee performance and net-of-fee performance. Our findings suggest that it is necessary to examine the gross-of-fee performance of hedge funds separately from the net-of-fee performance, which may give us a clearer picture of the risk structure and performance of hedge fund portfolios.
Book Synopsis Three essays on empirical finance by : Tse-Chun Lin
Download or read book Three essays on empirical finance written by Tse-Chun Lin and published by Rozenberg Publishers. This book was released on 2009 with total page 146 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays in Economics by : James Tobin
Download or read book Essays in Economics written by James Tobin and published by MIT Press. This book was released on 1996 with total page 838 pages. Available in PDF, EPUB and Kindle. Book excerpt: This fourth volume in the series of Nobel laureate James Tobin's classic papers represents his work since 1980. This fourth volume in the series of Nobel laureate James Tobin's classic papers represents his work since 1980. Both national and international views are intermingled among the 36 chapters on macroeconomics and fiscal policy, savings, stabilization policy, international coordination of macroeconomic policy, monetary policy, and exchange rates. Several tributes to colleagues--including Walter Heller and Seymour Harris--round out the collection.
