How is Liquidity Priced in Global Markets?

2020 ◽  
Author(s):  
Ines Chaieb ◽  
Vihang Errunza ◽  
Hugues Langlois
Keyword(s):  
Market Segmentation ◽  
Risk Premium ◽  
Risk Sharing ◽  
Emerging Market ◽  
World Market ◽  
Expected Returns ◽  
Local Market ◽  
Market Risk Premium ◽  
Asset Pricing Model ◽  
Market Premium

Abstract We develop a new global asset pricing model to study how illiquidity interacts with market segmentation and investability constraints in 42 markets. Noninvestable stocks that can only be held by foreign investors earn higher expected returns compared to freely investable stocks due to limited risk sharing and higher illiquidity. In addition to the world market premium, on average, developed and emerging market noninvestables earn an annual unspanned local market risk premium of $1.17\%$ and $9.04\%$, and a liquidity level premium of $1.06\%$ and $2.39\%$, respectively. These results obtained in a conditional setup are robust to the choice of liquidity measure.

scholarly journals KOMPARASI CAPITAL ASSET PRICING MODEL DAN FAMA-FRENCH THREE FACTOR MODEL DALAM MEMPREDIKSI RETURN SAHAM

2018 ◽  
pp. 747
Author(s):  
Ni Putu Desy Ratna Dewi ◽  
I Wayan Suartana
Keyword(s):  
Asset Pricing ◽  
Risk Premium ◽  
Factor Model ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Market Risk Premium ◽  
Asset Pricing Model ◽  
Size Premium ◽  
Market Premium

Tujuan dari penelitian ini adalah untuk membandingkan kemampuan CAPM dan FF3FM dalam memprediksi return saham di Bursa Efek Indonesia.  Populasi dalam penelitian ini adalah perusahaan-perusahaan terdaftar di Bursa Efek Indonesia yang termasuk dalam kelompok saham Indeks Kompas 100 pada periode 2012-2016. Hasil penelitian menunjukkan bahwa variabel market risk premium berpengaruh positif terhadap return pada enam portofolio yang dibentuk dalam CAPM dan FF3FM. Variabel size premium berpengaruh positif pada return portofolio S/H, S/M, dan S/L dan berpengaruh negatif pada return portofolio B/H, B/M, dan B/L. Variabel book to market premium berpengaruh positif pada return portofolio B/H, S/H, dan S/M dan berpengaruh negatif pada return portofolio B/L dan S/L. Sedangkan variabel book to market premium tidak berpengaruh pada return portofolio B/M. Nilai adjusted R square CAPM dan FF3FM menunjukkan bahwa kemampuan FF3FM lebih baik dalam menjelaskan return dibandingkan CAPM.

The Cross Section of Expected Returns with MIDAS Betas

2011 ◽  
Vol 47 (1) ◽  
pp. 115-135 ◽  
Author(s):  
Mariano González ◽  
Juan Nave ◽  
Gonzalo Rubio
Keyword(s):  
Cross Section ◽  
Risk Premium ◽  
Market Risk ◽  
Ordinary Least Squares ◽  
Mixed Data ◽  
Expected Returns ◽  
Data Sampling ◽  
Cross Sectional ◽  
Market Risk Premium ◽  
The Cross

AbstractThis paper explores the cross-sectional variation of expected returns for a large cross section of industry and size/book-to-market portfolios. We employ mixed data sampling (MIDAS) to estimate a portfolio’s conditional beta with the market and with alternative risk factors and innovations to well-known macroeconomic variables. The market risk premium is positive and significant, and the result is robust to alternative asset pricing specifications and model misspecification. However, the traditional 2-pass ordinary least squares (OLS) cross-sectional regressions produce an estimate of the market risk premium that is negative, and significantly different from 0. Using alternative procedures, we compare both beta estimators. We conclude that beta estimates under MIDAS present lower mean absolute forecasting errors and generate better out-of-sample performance of the optimized portfolios relative to OLS betas.

scholarly journals Pricing Liquidity Risk with Heterogeneous Investment Horizons

2020 ◽  
pp. 1-36 ◽  
Author(s):  
Alessandro Beber ◽  
Joost Driessen ◽  
Anthony Neuberger ◽  
Patrick Tuijp
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Liquidity Risk ◽  
Asset Returns ◽  
Spillover Effects ◽  
Expected Returns ◽  
Pricing Model ◽  
Liquidity Premium ◽  
Asset Pricing Model ◽  
Illiquid Asset

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small.

scholarly journals MARKET SEGMENTATION AND NOISE TRADER RISK

2000 ◽  
Vol 03 (01) ◽  
pp. 85-100 ◽  
Author(s):  
VIHANG ERRUNZA ◽  
KED HOGAN ◽  
MAO-WEI HUNG
Keyword(s):  
Market Segmentation ◽  
Capital Market ◽  
Risk Premium ◽  
International Investment ◽  
International Capital ◽  
Fully Integrated ◽  
Asset Pricing Model ◽  
Noise Trader ◽  
Cross Border ◽  
Investment Barriers

A simple asset pricing model is developed to take into account two important characteristics in global investments: market segmentation and noise trader risk. Our results show the removal of international investment barriers and cross-border listings have not led to a fully integrated international capital market. We also show that different degree of investor rationality across borders induces an additional component of risk premium which is related to the "noise spill-over effect".

scholarly journals Time-Varying Market Leverage and the Market Risk Premium in New Zealand

2021 ◽  
Author(s):  
◽  
Danyi Bao
Keyword(s):  
New Zealand ◽  
Asset Pricing ◽  
Risk Premium ◽  
Market Risk ◽  
Capital Asset Pricing ◽  
Time Varying ◽  
Pricing Model ◽  
Capital Asset ◽  
Market Risk Premium ◽  
Asset Pricing Model

<p>This paper applies the Ibbotson and Sinquefield (1976) method and the Lally (2002) method to New Zealand data over the period 1960-2005 in order to estimate the market risk premium (MRP) in two versions of the capital asset pricing model (CAPM). With respect to the standard CAPM, the resulting Ibbotson estimate of the MRP for New Zealand was 6.11%. The resulting Lally estimate of the MRP ranged from 5.52% (in 1970) to 18.40% (in 1990), with an average of 7.95%, and was 6.40% for 2005. With respect to the simplified Brennan-Lally CAPM, the resulting Ibbotson estimate of the MRP for New Zealand was 8.49%. The resulting Lally estimate of the MRP ranged from 7.91% (in 1970) to 20.79% (in 1990), with an average of 10.33%, and was 8.78% for 2005. The Lally and the Ibbotson estimates of the MRP are similar in general. However, when market leverage is unusually high or low, they diverge significantly. In future, practitioners may need to choose between the estimates from the two methods when market leverage goes beyond the normal level.</p>

scholarly journals Testing Multi-Factor Models in ADRs: Emerging Market vs. Developed Market

2020 ◽  
Vol 5 (1) ◽  
pp. 12-21
Author(s):  
Tingting Que ◽  
Wai Yin Mok ◽  
Kit Yee Cheung
Keyword(s):  
Risk Factors ◽  
Risk Premium ◽  
Factor Model ◽  
Five Factor Model ◽  
Emerging Market ◽  
Abnormal Returns ◽  
International Market ◽  
Market Risk Premium ◽  
Developed Markets ◽  
Traditional Risk Factors

This paper tests whether the Carhart four-factor model and the Fama-French five-factor model can explain variation in returns of 1,230 ADRs originating from six developed markets and five emerging markets. We aim to compare emerging market ADRs with developed market ADRs in terms of traditional risk factors significance, model fitness and the existence of abnormal returns. Overall, we find that substantial variations exist among ADRs by their origin-of-market. First, both models show that most of the positive abnormal returns we document accrue to emerging market ADRs, mainly Chinese ADRs. Among the risk factors, market risk premium is found to be most prevalent in both emerging and developed markets. Although we find some difference in the presence of particular risk factors employed in the four-factor vs. five-factor model, overall, there are no significant differences in the explanation power between the two models. Lastly, the low R2 values imply that both models do not work very well with the international market ADRs. 

The effect of leverage on the performance of real estate companies

2018 ◽  
Vol 11 (3) ◽  
pp. 284-318 ◽  
Author(s):  
Giacomo Morri ◽  
Karoline Jostov
Keyword(s):  
Real Estate ◽  
Risk Premium ◽  
Market Risk ◽  
Local Market ◽  
Cross Sectional ◽  
Content Type ◽  
Crisis Period ◽  
Market Risk Premium ◽  
Fama And French ◽  
The Impact

Purpose This paper aims to investigate the impact of leverage on the total shareholder return of European publicly traded real estate vehicles in three periods: Crisis Period (2007-2009), Rebound Period (2009-2014) and the Whole Period. Design/methodology/approach Cross-sectional analysis is used and the leverage effect on the performance is controlled for seven other independent variables (local market risk premium, size, book-to-market, short-term debt, cash); moreover, regional differences are accounted for. Findings It is established that during the Crisis Period, leverage levels are negatively associated with performance: this relationship also holds throughout the Whole Period, implying that for real estate securities, the cost of financial distress is larger than the potential gain from taxation, although the economic significance of it is limited. The Fama and French (1992) three factors, including size, book-to-market and local market risk premium, are found to be relevant, which is consistent with the literature. In addition, the UK and Sweden regions are identified as significant. Originality/value Even if there is sizeable body of literature on determinants of leverage and determinants of asset returns, little work has been done on how leverage affects the returns of European real estate companies. In addition, this paper takes advantage of observations from a full economic cycle and the possible effects of the crisis period.

scholarly journals Time-Varying Market Leverage and the Market Risk Premium in New Zealand

2021 ◽  
Author(s):  
◽  
Danyi Bao
Keyword(s):  
New Zealand ◽  
Asset Pricing ◽  
Risk Premium ◽  
Market Risk ◽  
Capital Asset Pricing ◽  
Time Varying ◽  
Pricing Model ◽  
Capital Asset ◽  
Market Risk Premium ◽  
Asset Pricing Model

<p>This paper applies the Ibbotson and Sinquefield (1976) method and the Lally (2002) method to New Zealand data over the period 1960-2005 in order to estimate the market risk premium (MRP) in two versions of the capital asset pricing model (CAPM). With respect to the standard CAPM, the resulting Ibbotson estimate of the MRP for New Zealand was 6.11%. The resulting Lally estimate of the MRP ranged from 5.52% (in 1970) to 18.40% (in 1990), with an average of 7.95%, and was 6.40% for 2005. With respect to the simplified Brennan-Lally CAPM, the resulting Ibbotson estimate of the MRP for New Zealand was 8.49%. The resulting Lally estimate of the MRP ranged from 7.91% (in 1970) to 20.79% (in 1990), with an average of 10.33%, and was 8.78% for 2005. The Lally and the Ibbotson estimates of the MRP are similar in general. However, when market leverage is unusually high or low, they diverge significantly. In future, practitioners may need to choose between the estimates from the two methods when market leverage goes beyond the normal level.</p>

scholarly journals The Determinants of Stock Returns in the Emerging Market of Kenya: An Empirical Evidence

2017 ◽  
Vol 9 (9) ◽  
pp. 8 ◽  
Author(s):  
Muinde Patrick Mumo
Keyword(s):  
Interest Rates ◽  
Stock Returns ◽  
Time Series Data ◽  
Emerging Market ◽  
Series Data ◽  
Capital Asset Pricing ◽  
Macroeconomic Factors ◽  
Asset Pricing Model ◽  
Step Procedure ◽  
Market Premium

This study examined the sources of risk factors that determine stock returns in the emerging market of Kenya. The specific objectives were to determine the validity of the Capital Asset Pricing Model (CAPM) and then empirically test for factors that are priced in stock returns in Kenya.The factors examined are the excess market premium and selected macroeconomic factors including inflation, exchange rates, money supply and short term interest rates. The study utilizes monthly time series data for the period April 1996: December 2016. The CAPM, a multifactor approach and Fama and MacBeth (1973) two-step procedure are used for data analysis.The study finds that CAPM cannot be rejected and that the market premium is the most important factor in explaining stock return variability in Kenya. Therefore, the study concludes that unlike the recent evidence on the collapse of CAPM in advanced markets, the model can still be validly used for the Kenyan market.

scholarly journals Risk, Uncertainty, and Expected Returns

2016 ◽  
Vol 51 (3) ◽  
pp. 707-735 ◽  
Author(s):  
Turan G. Bali ◽  
Hao Zhou
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Risk Premia ◽  
Expected Returns ◽  
Cross Sectional ◽  
Asset Pricing Model ◽  
Variance Risk Premium ◽  
Equity Portfolios ◽  
Variance Risk ◽  
Highly Correlated

AbstractA conditional asset pricing model with risk and uncertainty implies that the time-varying exposures of equity portfolios to the market and uncertainty factors carry positive risk premia. The empirical results from the size, book-to-market, momentum, and industry portfolios indicate that the conditional covariances of equity portfolios with market and uncertainty predict the time-series and cross-sectional variation in stock returns. We find that equity portfolios that are highly correlated with economic uncertainty proxied by the variance risk premium (VRP) carry a significant annualized 8% premium relative to portfolios that are minimally correlated with VRP.

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