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 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 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 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 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 in the Eye of the Beholder written by Xuanjuan Chen and published by . This book was released on 2018 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines how liquidity and investors' heterogeneous liquidity preferences interact toaffect asset pricing. Using data on insurers' corporate bond holdings, we find that the illiquidity ofcorporate bond portfolios varies widely and persistently across insurers, and is related to insurers'investment horizons and funding constraints, consistent with the notion of liquidity clientele. Wefurther find that liquidity clienteles affect corporate bond prices|specifically, liquidity premia arelower among corporate bonds heavily held by investors with a weaker preference for liquidity.

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 Liquidity Premium for Capital Asset Pricing with Transaction Costs written by Steven E. Shreve and published by . This book was released on 1993 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: "An agent solves an infinite-horizon consumption-investment problem when the investment possibilities are a constant-interest-rate, risk-free asset and a stock, modelled as a geometric Brownian motion. There are proportional transaction costs associated with moving wealth between these two assets. The direct utility for consumption is of the form 1/p c[superscript p] for some p [element of] (0,1). The sensitivity of the indirect utility function (or value function) to small transaction costs is found to be of the order of the transaction cost to the 2/3 power."

Download or read book Term Structure s of the Equity Risk Premium written by Leandro Gomes and published by . This book was released on 2019 with total page 91 pages. Available in PDF, EPUB and Kindle. Book excerpt: By simultaneously using dividend and variance swap data, we show how the term structure of the equity risk premium varies over time and how its shape is affected by liquidity risk premia. The term structure is always positively sloped, while funding liquidity premia and betas explain the high unconditional returns for all dividend claims. Alphas for short-dated dividend claims are actually negative implying that their returns are too low, whereas alphas for long-dated claims seem to be positive. The term structure slope varies positively with the market risk premium, but it is never negative relative to the first contract -- due to the nearly zero risk premium in the first maturity -- and rarely hump-shaped in some empirical models. We show how the maturity term structure -- the risk premium for dividend strips with different maturities -- is connected to both the horizon term structure -- linked to the variance swap term structure -- and various funding liquidity measures. The risk premium is on average increasing with investment horizon, while the maturity risk premium depends primarily on the short-horizon risk premium, implying that short-horizon investors are the marginal ones. All our results hold in the US, the UK, Europe and Japan.

Download or read book Transaction Costs Trading Volume and the Liquidity Premium written by Stefan Gerhold and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities, and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the optimal investment policy, its implied welfare, liquidity premium, and trading volume. At the first order, the liquidity premium equals the spread, times share turnover, times a universal constant. Results are robust to consumption and finite-horizons. We exploit the equivalence of the transaction cost market to another frictionless market, with a shadow risky asset, in which investment opportunities are stochastic. The shadow price is also found explicitly.

Download or read book Factor Investing and Asset Allocation A Business Cycle Perspective written by Vasant Naik and published by CFA Institute Research Foundation. This book was released on 2016-12-30 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt:

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:

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 The Spread of Financial Sophistication Through Emerging Markets Worldwide written by John W. Kensinger and published by Emerald Group Publishing. This book was released on 2016-07-26 with total page 375 pages. Available in PDF, EPUB and Kindle. Book excerpt: Research in Finance Vol 32 reflects the current and primary issues in financial markets and to applying financial modeling in emerging markets.

Download or read book Market Liquidity written by Thierry Foucault and published by Oxford University Press. This book was released on 2023 with total page 531 pages. Available in PDF, EPUB and Kindle. Book excerpt: "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"--

Download or read book Investment Philosophies written by Aswath Damodaran and published by John Wiley & Sons. This book was released on 2012-06-22 with total page 615 pages. Available in PDF, EPUB and Kindle. Book excerpt: The guide for investors who want a better understanding of investment strategies that have stood the test of time This thoroughly revised and updated edition of Investment Philosophies covers different investment philosophies and reveal the beliefs that underlie each one, the evidence on whether the strategies that arise from the philosophy actually produce results, and what an investor needs to bring to the table to make the philosophy work. The book covers a wealth of strategies including indexing, passive and activist value investing, growth investing, chart/technical analysis, market timing, arbitrage, and many more investment philosophies. Presents the tools needed to understand portfolio management and the variety of strategies available to achieve investment success Explores the process of creating and managing a portfolio Shows readers how to profit like successful value growth index investors Aswath Damodaran is a well-known academic and practitioner in finance who is an expert on different approaches to valuation and investment This vital resource examines various investing philosophies and provides you with helpful online resources and tools to fully investigate each investment philosophy and assess whether it is a philosophy that is appropriate for you.

Download or read book Multi Asset Investing written by Yoram Lustig and published by Harriman House Limited. This book was released on 2013-01-07 with total page 405 pages. Available in PDF, EPUB and Kindle. Book excerpt: Planning, constructing and managing a multi-asset portfolio A multi-asset investment management approach provides diversification benefits, enhances risk-adjusted returns and enables a portfolio to be tailored to a wide range of investing objectives, whether these are generating returns or income, or matching liabilities. This book is divided into four parts that follow the four stages of the multi-asset investment management process: 1. Establishing objectives: Defining the return objectives, risk objectives and investment constraints of a portfolio. 2. Setting an investment strategy: Setting a plan to achieve investment objectives by thinking about long-term strategic asset allocation, combining asset classes and optimisation to derive the most efficient asset allocation. 3. Implementing a solution: Turning the investment strategy into a portfolio using short-term tactical asset allocation, investment selection and risk management. This section includes examples of investment strategies. 4. Reviewing: Evaluating the performance of a portfolio by examining results, risk, portfolio positioning and the economic environment. By dividing the multi-asset investment process into these well-defined stages, Yoram Lustig guides the reader through the various decisions that have to be made and actions that have to be taken. He builds carefully from defining investment objectives, formulating an investment strategy and the steps of selecting investments, leading to constructing and managing multi-asset portfolios. At each stage the considerations and strategies to be undertaken are detailed, and the description of the process is supported with relevant financial theory as well as practical, real-life examples. 'Multi-asset Investing' is an essential handbook for the modern approach to investment portfolio management.