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Stock And Bond Pricing With Liquidity Risk
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Download or read book Market Liquidity written by Yakov Amihud and published by Cambridge University Press. This book was released on 2013 with total page 293 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book explores the effect of liquidity on asset prices, liquidity variations over time and how liquidity risk affects prices.
Book Synopsis Stock and Bond Pricing with Liquidity Risk by : Ruslan Goyenko
Download or read book Stock and Bond Pricing with Liquidity Risk written by Ruslan Goyenko and published by . This book was released on 2007 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper tests the liquidity linkage between the stock and Treasury bond markets and its implications for asset pricing. We find that liquidity has a cross-market effect, which we attribute to trading activity across markets. We show that stock returns contain not only an illiquidity premium of the stock market as has been documented in the literature, but also an illiquidity premium of the bond market. A difference of 10 percentage points in the exposure to bond illiquidity risk between two stocks translates into a difference of 7 to 9 percent in their expected returns per year. Bond returns also contain an illiquidity premium of both the stock and bond markets. We document that the illiquidity of the stock market and/or unexpected shock to the bond market illiquidity dominate the momentum factor in the Carhart's (1997) four-factor model. We introduce a five-factor model. Finally, we test the cross-market liquidity effect within an arbitrage-free affine joint stock and bond pricing model with stock and bond market liquidity included in the vector of state variables, and find support for the model. Under the model's restrictions, a 10 percentage points change in the stock illiquidity leads to 1.4% change in the risk free rate per year. Overall, the paper contributes to the integration between stock and bond markets.
Download or read book Market Liquidity written by Yakov Amihud and published by Cambridge University Press. This book was released on 2012-11-12 with total page 293 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Liquidity and Asset Prices by : Yakov Amihud
Download or read book Liquidity and Asset Prices written by Yakov Amihud and published by Now Publishers Inc. This book was released on 2006 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis How Important Is Liquidity Risk for Sovereign Bond Risk Premia? by : Ron Alquist
Download or read book How Important Is Liquidity Risk for Sovereign Bond Risk Premia? written by Ron Alquist and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Liquidity and International Bond Pricing by : Sakkapop Panyanukul
Download or read book Liquidity and International Bond Pricing written by Sakkapop Panyanukul and published by . This book was released on 2010 with total page 412 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 Market Liquidity Risk by : Andria van der Merwe
Download or read book Market Liquidity Risk written by Andria van der Merwe and published by Springer. This book was released on 2016-01-12 with total page 211 pages. Available in PDF, EPUB and Kindle. Book excerpt: Andria van der Merwe provides a thorough guide to the critical tools needed to navigate liquidity markets and value security pricing in the presence of market frictions and information asymmetries. This is essential reading for anyone with a current or future interest in liquidity models, market structures, and trading mechanisms.
Book Synopsis Modern Financial Markets by : David W. Blackwell
Download or read book Modern Financial Markets written by David W. Blackwell and published by John Wiley & Sons. This book was released on 2006-12-18 with total page 516 pages. Available in PDF, EPUB and Kindle. Book excerpt: Throughout this concise, accessible book, readers will quickly learn the fundamental concepts of managerial finance while discovering how things really work. The material is explained using an intuitive theoretical context, providing them with a richer understanding of the material and better insights into solving problems. Finance concepts are covered in a common sense manner and the use of mathematical jargon is minimized. The unifying theme for the book is the concept of valuation since it is the most fundamental concept in finance. The authors define and discuss value in terms of net present value (NPV).
Book Synopsis Liquidity Risk Premia in Corporate Bond Markets by : Frank De Jong
Download or read book Liquidity Risk Premia in Corporate Bond Markets written by Frank De Jong and published by . This book was released on 2009 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have signifcant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.6% per annum for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1.5% per annum. We find very similar evidence for the liquidity risk exposure of corporate bonds for a sample of European corporate bond prices.
Book Synopsis Asset Pricing with Liquidity Risk by : Viral V. Acharya
Download or read book Asset Pricing with Liquidity Risk written by Viral V. Acharya and published by . This book was released on 2004 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A Primer for Risk Measurement of Bonded Debt from the Perspective of a Sovereign Debt Manager by : Michael G. Papaioannou
Download or read book A Primer for Risk Measurement of Bonded Debt from the Perspective of a Sovereign Debt Manager written by Michael G. Papaioannou and published by International Monetary Fund. This book was released on 2006-08 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents some conventional and new measures of market, credit, and liquidity risks for government bonds. These measures are analyzed from the perspective of a sovereign's debt manager. In particular, it examines duration, convexity, M-square, skewness, kurtosis, and VaR statistics as measures of interest rate exposure; a VaR statistic as the prominent measure of exchange rate exposure; the balance sheet approach (or contingent claims approach), and its consequent probability of default as the most promising measure of credit risk exposure; and an elasticity approach and a VaR statistic to measure liquidity risk. Along with the formulas for the various statistics proposed, we provide simple examples of their application to some common risk valuation cases. Finally, we present an integrated approach for the simultaneous estimation of a portfolio's interest rate and exchange rate risk using the VaR methodology. The integrated approach is then extended to also include N risk factors. This approach allows us to measure the total risk of a portfolio, provided that the volatilities and correlations among the risk factors can be estimated.
Book Synopsis Essays in Empirical Option, Stock, and Bond Pricing by :
Download or read book Essays in Empirical Option, Stock, and Bond Pricing written by and published by . This book was released on 2014 with total page 266 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies asset prices empirically in option, stock, and bond markets. Chapter 1 examines stock options in the context of stock-market momentum, dynamic (crash-resistant) momentum, and short-run reversals. In contrast to standard option-pricing theory, option prices are a function of past returns: relative to puts, calls become expensive when past returns predict high future returns and vice versa, indicating buying pressure to exploit predictability in the underlying. This price pressure varies with investor sophistication: sophisticated investors trade significantly on the momentum strategies, which supports a view of momentum as mispricing with favorable risk-reward trade-offs. Less sophisticated investors trade momentum and reversals, but not dynamic momentum. Despite its relation to past returns, option buying pressure predicts future stock returns separately from the analyzed strategies. In option markets, reversals are only profitable before transaction costs and dynamic momentum yields the highest profits after costs. Chapter 2 studies composite measures of stock-market liquidity which are calculated to capture the commonality across nine individual liquidity measures. As a stock characteristic, composite liquidity is priced cross-sectionally, and most individual measures are not priced in addition. While five-factor models with Pastor and Stambaugh (2003) or Sadka (2006) liquidity factors are insufficient to explain the returns of composite liquidity sorted portfolios, the liquidity factor developed in this paper describes the distribution of composite liquidity sorted returns well. Comparing composite liquidity characteristics and factor loadings, however, the characteristics bear the stronger relation to returns. Chapter 3 studies the effects of ETF holdings and trades on corporate bond prices and liquidity. ETF trades impact bond prices by around five basis points per $1 million traded, which is symmetric for buys and sells, and partially reverses after the trade. The study finds mixed results for corporate bond liquidity, studied around a natural experiment of exogenous changes in ETF holdings: effective spreads and Bao, Pan, and Wang's (2011) gamma are mostly increasing in ETF holdings. In contrast, trade-direction-indicator-variable regressions indicate that a negative relation between ETF holdings and the noninformation component of the spread dominates a small but positive relation with the information component of the spread.
Book Synopsis Handbook of Fixed-Income Securities by : Pietro Veronesi
Download or read book Handbook of Fixed-Income Securities written by Pietro Veronesi and published by John Wiley & Sons. This book was released on 2016-04-04 with total page 630 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive guide to the current theories and methodologies intrinsic to fixed-income securities Written by well-known experts from a cross section of academia and finance, Handbook of Fixed-Income Securities features a compilation of the most up-to-date fixed-income securities techniques and methods. The book presents crucial topics of fixed income in an accessible and logical format. Emphasizing empirical research and real-life applications, the book explores a wide range of topics from the risk and return of fixed-income investments, to the impact of monetary policy on interest rates, to the post-crisis new regulatory landscape. Well organized to cover critical topics in fixed income, Handbook of Fixed-Income Securities is divided into eight main sections that feature: • An introduction to fixed-income markets such as Treasury bonds, inflation-protected securities, money markets, mortgage-backed securities, and the basic analytics that characterize them • Monetary policy and fixed-income markets, which highlight the recent empirical evidence on the central banks’ influence on interest rates, including the recent quantitative easing experiments • Interest rate risk measurement and management with a special focus on the most recent techniques and methodologies for asset-liability management under regulatory constraints • The predictability of bond returns with a critical discussion of the empirical evidence on time-varying bond risk premia, both in the United States and abroad, and their sources, such as liquidity and volatility • Advanced topics, with a focus on the most recent research on term structure models and econometrics, the dynamics of bond illiquidity, and the puzzling dynamics of stocks and bonds • Derivatives markets, including a detailed discussion of the new regulatory landscape after the financial crisis and an introduction to no-arbitrage derivatives pricing • Further topics on derivatives pricing that cover modern valuation techniques, such as Monte Carlo simulations, volatility surfaces, and no-arbitrage pricing with regulatory constraints • Corporate and sovereign bonds with a detailed discussion of the tools required to analyze default risk, the relevant empirical evidence, and a special focus on the recent sovereign crises A complete reference for practitioners in the fields of finance, business, applied statistics, econometrics, and engineering, Handbook of Fixed-Income Securities is also a useful supplementary textbook for graduate and MBA-level courses on fixed-income securities, risk management, volatility, bonds, derivatives, and financial markets. Pietro Veronesi, PhD, is Roman Family Professor of Finance at the University of Chicago Booth School of Business, where he teaches Masters and PhD-level courses in fixed income, risk management, and asset pricing. Published in leading academic journals and honored by numerous awards, his research focuses on stock and bond valuation, return predictability, bubbles and crashes, and the relation between asset prices and government policies.
Book Synopsis Collateral Frameworks by : Kjell G. Nyborg
Download or read book Collateral Frameworks written by Kjell G. Nyborg and published by Cambridge University Press. This book was released on 2017 with total page 345 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first book-length study of the importance of collateral frameworks in monetary policy, focusing on the Eurozone and euro crisis.
Book Synopsis Price Discovery in the U.S. Bond Market by : Haimei Shao
Download or read book Price Discovery in the U.S. Bond Market written by Haimei Shao and published by . This book was released on 2011 with total page 103 pages. Available in PDF, EPUB and Kindle. Book excerpt: The world bond market is nearly twice as large as the equity market. The goal of this dissertation is to study the dynamics of bond price. Among the liquidity risk, interest rate risk and default risk, this dissertation will focus on the liquidity risk and trading strategy. Under the mathematical frame of stochastic control, we model price setting in U.S. bond markets where dealers have multiple instruments to smooth inventory imbalances. The difficulty in obtaining the optimal trading strategy is that the optimal strategy and value function depend on each other, and the corresponding HJB equation is nonlinear. To solve this problem, we derived an approximate optimal explicit trading strategy. The result shows that this trading strategy is better than the benchmark central symmetric trading strategy.
Book Synopsis Liquidity Risk Measurement and Management by : Leonard Matz
Download or read book Liquidity Risk Measurement and Management written by Leonard Matz and published by John Wiley & Sons. This book was released on 2006-11-10 with total page 413 pages. Available in PDF, EPUB and Kindle. Book excerpt: Major events such as the Asian crisis in 1997, the Russian default on short-term debt in 1998, the downfall of the hedge fund long-term capital management in 1998 and the disruption in payment systems following the World Trade Center attack in 2001, all resulted in increased management’s attention to liquidity risk. Banks have realized that adequate systems and processes for identifying, measuring, monitoring and controlling liquidity risks help them to maintain a strong liquidity position, which in turn will increase the confidence of investors and rating agencies as well as improve funding costs and availability. Liquidity Risk Measurement and Management: A Practitioner’s Guide to Global Best Practices provides the best practices in tools and techniques for bank liquidity risk measurement and management. Experienced bankers and highly regarded liquidity risk experts share their insights and practical experiences in this book.
