Download or read book Liquidity and Investment Horizon written by Volodymyr Vovchak and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Flight to Liquidity Due to Heterogeneity in Investment Horizon written by Qin Lei and published by . This book was released on 2009 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides some rational perspective for the flight-to-liquidity event. My model highlights the inherent difference in investors' investment horizon, and thus their sensitivity to changes in transaction costs in the stock and bond markets. When stock market deterioration results in higher trading costs, the existing marginal investor shifts wealth to bonds instead of remaining indifferent between stocks and bonds. At the new equilibrium, there is a higher fraction of bond ownership and a longer average investment horizon among stock holders. I demonstrate empirical evidence in strong support of the theoretical predictions and make the case for the flight-to-liquidity event as a result of investor heterogeneity in investment horizon.

Download or read book Liquidity Premium and Investment Horizon written by Barend Christiaan Vorster and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity is a measure of the ease with which an asset can be converted into cash. In a perfectly liquid market, conversion is instantaneous and does not incur costs. Amihud and Mendelson (1986:224) proposed that illiquidity increases the expected return on an investment (liquidity premium) and simultaneously lengthens the holding period. These two effects are known respectively as the 'spread-return relationship and the clientele effect and have theoretical as well as practical implications. From a theoretical perspective it may help to explain the gap between the capital asset pricing model (which assumes that markets are perfectly liquid) and the associated empirical evidence: which thus far has been rather poor. From a practical perspective, liquidity will influence stakeholders' decisions and market competitiveness (Amihud & Mendelson, 1991:61-64). The relevant stakeholders are governments, stock exchange regulators, corporations, investors and financial intermediaries. Emerging economies such as the South African economy typically have less liquid markets than the developed world. While this may be attractive for investors looking for higher returns, Amihud and Mendelson (1991:61) are of the opinion that liquid markets are more generally favoured by investors. Constantinides (1986:842-858), also proposes a model for liquidity, but found the liquidity premium to be of lesser importance than that proposed by Amihud and Mendelson (1986:223-231) but also supports the suggestion that investors will favour liquid markets. Although it is by no means a perfect proxy, a security's bid-ask spread has been found to be an attractive and effective measure of liquidity. It has been found to correlate with beta as well as market capitalisation and several other variables commonly used in capital markets research. Because of this correlation the effect of the bid-ask spread cannot be studied in isolation when regression techniques are employed (Ramanathan, 1998:166). This is particularly problematic because empirical evidence for beta, which is arguably the most important independent variable in financial cross sectional relationships, is weak. Beta has to be estimated and so it is not clear if real markets do not support CAPM theory or if beta cannot be estimated with the required accuracy. All of the common independent variables used in empirical capital markets research are correlated to beta, and for this reason it cannot be established if these variables have a real effect or if they are simply serving as a proxy for the difference between the real and the estimated beta. Various strategies have been proposed to increase the accuracy of beta estimation and these are discussed in detail in this research. Successes with these strategies have been mixed. A second problem encountered in the empirical research base relating to the CAPM is that in the theory the cross-sectional relationship is between expected market return (which cannot be observed due to the vast number of real investments beyond those listed on exchanges) and beta, whereas empirical research makes use of actual return on a market proxy and beta. In order for the actual return to approach the expected return, empirical studies have to be conducted over extended periods. Accurate data for such periods are generally lacking and severe macro-economic changes such as wars, may also affect rational economic behaviour. It has to be kept in mind that the entire CAPM theory flows from the simple assumption that investors aim to achieve the highest return per unit of risk, and so a rejection of beta is a rejection of rational investor behaviour. Liquidity however, addresses one of the assumptions of CAPM, namely that markets are perfectly liquid: which obviously is not met in real markets and so CAPM models expanded for liquidity should be a reasonably fundamental starting point for all empirical capital markets research. The current empirical evidence for the spread-return relationship is inconclusive. While some researchers have found a significant relationship, others have questioned the ability of the methodology to differentiate a true relationship from the proxy for errors in the estimated beta problem. Deductions (as explained in section 4.3) that have been made from the research of Marshall and Young (2003:176-186) in particular, provide strong evidence that at least some of the relationship is due to the errors in estimated beta problem. Little empirical work has been done on the clientele effect. Atkins and Dyl (1997:318-321) found a significant relationship between holding period and bid-ask spread, although their approach was somewhat unorthodox in the sense that portfolio formation was not done and the effect of beta was not tested. This study tests empirically both the spread-return relationship and the clientele effect on the Johannesburg Stock Exchange over the period stretching from January 2002 to June 2007. The methodology of Fama and Macbeth (1973:614-617) as well as the aggregated beta of Dimson (1979:203-204) were mainly used, with some modifications as suggested by other researchers. With regard to the spread-return relationship, the findings of this study do not support theoretical expectations. This may be due to the short time period that was used as well as the difficulty in estimating beta. To the contrary, very significant evidence for the clientele effect was found, with little to no influence from market capitalisation and beta, which is as expected. Further investigation into the spread-return relationship is required. If a liquidity premium is not present, foreign investors will favour liquid developed markets above the JSE. This implies that efforts of exchange regulators and the government to decrease illiquidity will lead to foreign portfolio investment inflow into the South African economy.

Download or read book Pricing Liquidity Risk with Heterogeneous Investment Horizons written by Alessandro Beber and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a liquidity-based asset pricing model featuring investors with heterogeneous investment horizons and stochastic transaction costs. In an equilibrium where all investors invest in all assets (integration), we find that the existence of investors with heterogeneous horizons, as opposed to homogeneous horizons, reduces the importance of liquidity risk relative to the standard CAPM market risk and generates a more complex effect of expected liquidity. In an equilibrium where short-term investors do not invest in some more illiquid assets (partial segmentation), our model generates an additional segmentation premium for these assets. We estimate the model for the cross-section of U.S. stocks using GMM and find that our heterogeneous-horizon asset pricing model fares better than a standard liquidity-adjusted CAPM. The segmented version of our model delivers the best cross-sectional fit and generates a substantial effect of expected liquidity on expected returns.

Download or read book Time Horizons and Technology Investments written by National Academy of Engineering and published by National Academies Press. This book was released on 1992-02-01 with total page 119 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is frequently argued that U.S. corporations have shorter time horizons for planning and investment than their Japanese and German competitors. This argument, though widely accepted in studies of U.S. competitiveness, has rarely been examined in depth. Time Horizons and Technology Investments explores the evidence that some U.S. corporations consistently select projects biased toward short-term return and addresses factors influencing the time-related preferences of U.S. corporate managers in selecting projects for investment. It makes recommendations to policymakers and managers about policies to mitigate negative external influences and about strategies to remove internal biases toward noncompetitive decisions.

Download or read book Liquidity Effects of Institutional Investment Horizons written by Zhen Lei and published by . This book was released on 2018 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine whether institutional investors with different investment horizons exert different influences on a stock's liquidity effects. Our findings show that stocks increased by short-term institutions become more liquid while stocks increased by long-term institutions become less liquid. Furthermore, short-term institutions pay more attention to changes in a firm's recent fundamentals than long-term institutions and changes in liquidity effects resulting from holding changes of short-term institutions have more explanation power on stock returns in the next quarter than those resulting from long-term institutions, suggesting short-term institutions are more informed about a firm's short-term fundamentals than long-term institutions. Finally, we find increased holdings of both short-term and long-term institutions for a stock caused by improvement in a firm's fundamentals generally make the stock more liquid, suggesting institutional demand provides a channel through which a firm's fundamentals can influence its stock liquidity.

Download or read book A Practitioner s Guide to Asset Allocation written by William Kinlaw and published by John Wiley & Sons. This book was released on 2017-05-02 with total page 259 pages. Available in PDF, EPUB and Kindle. Book excerpt: Since the formalization of asset allocation in 1952 with the publication of Portfolio Selection by Harry Markowitz, there have been great strides made to enhance the application of this groundbreaking theory. However, progress has been uneven. It has been punctuated with instances of misleading research, which has contributed to the stubborn persistence of certain fallacies about asset allocation. A Practitioner's Guide to Asset Allocation fills a void in the literature by offering a hands-on resource that describes the many important innovations that address key challenges to asset allocation and dispels common fallacies about asset allocation. The authors cover the fundamentals of asset allocation, including a discussion of the attributes that qualify a group of securities as an asset class and a detailed description of the conventional application of mean-variance analysis to asset allocation.. The authors review a number of common fallacies about asset allocation and dispel these misconceptions with logic or hard evidence. The fallacies debunked include such notions as: asset allocation determines more than 90% of investment performance; time diversifies risk; optimization is hypersensitive to estimation error; factors provide greater diversification than assets and are more effective at reducing noise; and that equally weighted portfolios perform more reliably out of sample than optimized portfolios. A Practitioner's Guide to Asset Allocation also explores the innovations that address key challenges to asset allocation and presents an alternative optimization procedure to address the idea that some investors have complex preferences and returns may not be elliptically distributed. Among the challenges highlighted, the authors explain how to overcome inefficiencies that result from constraints by expanding the optimization objective function to incorporate absolute and relative goals simultaneously. The text also explores the challenge of currency risk, describes how to use shadow assets and liabilities to unify liquidity with expected return and risk, and shows how to evaluate alternative asset mixes by assessing exposure to loss throughout the investment horizon based on regime-dependent risk. This practical text contains an illustrative example of asset allocation which is used to demonstrate the impact of the innovations described throughout the book. In addition, the book includes supplemental material that summarizes the key takeaways and includes information on relevant statistical and theoretical concepts, as well as a comprehensive glossary of terms.

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.

Download or read book Asset Allocation written by William Kinlaw and published by John Wiley & Sons. This book was released on 2021-07-27 with total page 375 pages. Available in PDF, EPUB and Kindle. Book excerpt: Discover a masterful exploration of the fallacies and challenges of asset allocation In Asset Allocation: From Theory to Practice and Beyond—the newly and substantially revised Second Edition of A Practitioner’s Guide to Asset Allocation—accomplished finance professionals William Kinlaw, Mark P. Kritzman, and David Turkington deliver a robust and insightful exploration of the core tenets of asset allocation. Drawing on their experience working with hundreds of the world’s largest and most sophisticated investors, the authors review foundational concepts, debunk fallacies, and address cutting-edge themes like factor investing and scenario analysis. The new edition also includes references to related topics at the end of each chapter and a summary of key takeaways to help readers rapidly locate material of interest. The book also incorporates discussions of: The characteristics that define an asset class, including stability, investability, and similarity The fundamentals of asset allocation, including definitions of expected return, portfolio risk, and diversification Advanced topics like factor investing, asymmetric diversification, fat tails, long-term investing, and enhanced scenario analysis as well as tools to address challenges such as liquidity, rebalancing, constraints, and within-horizon risk. Perfect for client-facing practitioners as well as scholars who seek to understand practical techniques, Asset Allocation: From Theory to Practice and Beyond is a must-read resource from an author team of distinguished finance experts and a forward by Nobel prize winner Harry Markowitz.

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.

Download or read book Liquidity Shocks and Equilibrium Liquidity Premia written by Ming Huang and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the impact of transaction costs on portfolio selection and equilibrium asset returns in an economy in which investors who face surprise liquidity shocks invest in liquid and illiquid riskless assets. We find that the portfolio policy and the equilibrium liquidity premium of investors who are well prepared for a liquidity shock are not, for small transaction costs, significantly different from those of investors with a fixed investment horizon. Investors who face constraints on borrowing against future income and have reserved little wealth against liquidity shocks, however, act as if they have a short investment horizon. The equilibrium liquidity premium for such investors can be significantly higher than that demanded by investors with a fixed investment horizon that is equal to the expected arrival time of a liquidity shock. This difference is due to the higher net return of the liquid asset, relative to that of the illiquid asset, in the case of an early liquidity shock (when investors have lower reserves and thus higher marginal utility). The liquidity premium is higher if agents are more risk-averse, and is higher if the liquid asset supply is smaller. We discuss the relevance of this result when one reconciles between market holding horizons and market liquidity premia.

Download or read book Institutional Ownership and Stock Liquidity written by Prasun Agarwal and published by . This book was released on 2007 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: The study examines the relationship between institutional ownership and liquidity of stocks, focusing on the effect of institutions' information advantage on liquidity. The information advantage of institutions can affect liquidity through two channels: adverse selection and information efficiency. The adverse selection effect results from an increase in information asymmetry. The information efficiency effect, however, results from an increase in competition among institutions. Competition promotes the rate at which private information is incorporated into prices, reducing uncertainty about future payoffs. I find evidence of a nonmonotonic (U-shaped) relationship between the fraction of shares of a firm held by institutions and various measures of stock liquidity. This evidence of a nonmonotonic relationship strongly suggests that the two effects coexist and interact with each other. The effect of information advantage of institutions on liquidity also varies with the amount of publicly available information and asset risk. My evidence indicates that institutional ownership (Granger) causes liquidity, allaying, to an extent, concerns that findings are a result of institutions' preference for liquid stocks. Lastly, I document that institutional investor characteristics, such as investment horizon and risk aversion, also affect liquidity. Liquidity decreases with both increases in fraction of equity held by long-term investors and risk aversion of institutional investor.

Download or read book Horizon Pricing written by Avraham Kamara and published by . This book was released on 2018 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: The literature documents heterogeneity in the delay of stock-price reaction to systematic shocks, implying that asset risk depends on investment horizon. We study the pricing of risk factors across investment horizons. Value (liquidity) risk is priced over intermediate (short) horizons. Conditioning horizon-factor exposures on firm characteristics indicates that characteristics, with the exception of momentum, are not priced beyond their contribution to systematic risk. Long-horizon institutional investors overweight assets with high intermediate-horizon exposures to HML risk and high short-horizon exposures to liquidity risk. The results highlight the importance of investment horizon in determining risk premia.

Download or read book Investment Analysis written by Reilly and published by . This book was released on 1997-02 with total page 462 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Procyclical Behavior of Institutional Investors During the Recent Financial Crisis written by Mr.Michael G Papaioannou and published by International Monetary Fund. This book was released on 2013-09-11 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper (i) provides evidence on the procyclical investment behavior of major institutional investors during the global financial crisis; (ii) identifies the main factors that could account for such behavior; (iii) discusses the implications of procyclical behavior; and (iv) proposes a framework for sound investment practices for long-term investors. Such procyclical investment behavior is understandable and may be considered rational from an individual institution’s perspective. However, our main conclusion is that behaving in a manner consistent with longterm investing would lead to better long-term, risk-adjusted returns and, importantly, could lessen the potential adverse effects of the procyclical investment behavior of institutional investors on global financial stability.

Download or read book Optimal Portfolio Selection written by Ping Cheng and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modern Portfolio Theory is a single-period model developed for the efficient securities market, in which asset prices are implicitly assumed to follow a random walk. It is widely agreed that real estate does not fit into the efficient market paradigm; however, mixed-asset portfolio analysis continues to rely on Modern Portfolio Theory. This paper proposes an alternative model that extends the Modern Portfolio Theory to accommodate multi-period utility maximization as well as the unique characteristics of real estate such as liquidity risk, horizon-dependence of real estate returns and high transaction cost. The model is easy to be implemented. Using real world data, it demonstrates the optimal allocation to real estate in the mixed-asset portfolio is quite in line with the reality of institutional portfolios.

Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt: