scholarly journals Incomplete Information and the Liquidity Premium Puzzle

2020 ◽  
Author(s):  
Yingshan Chen ◽  
Min Dai ◽  
Luis Goncalves-Pinto ◽  
Jing Xu ◽  
Cheng Yan
Keyword(s):  
Incomplete Information ◽  
Stock Returns ◽  
Empirical Support ◽  
Risk Exposure ◽  
Trading Costs ◽  
Liquidity Premium ◽  
High Turnover ◽  
Benchmark Model ◽  
Premium Puzzle ◽  
Liquidity Premia

We examine the problem of an investor who trades in a market with unobservable regime shifts. The investor learns from past prices and is subject to transaction costs. Our model generates significantly larger liquidity premia compared with a benchmark model with observable market shifts. The larger premia are driven primarily by suboptimal risk exposure, as turnover is lower under incomplete information. In contrast, the benchmark model produces (mechanically) high turnover and heavy trading costs. We provide empirical support for the amplification effect of incomplete information on the relation between trading costs and future stock returns. We also show empirically that such amplification is not driven by turnover. Overall, our results can help explain the large disconnect between theory and evidence regarding the magnitude of liquidity premia, which has been a longstanding puzzle in the literature. This paper was accepted by Kay Giesecke, finance.

Incomplete Information, Trading Costs and Cross-autocorrelations in Stock Returns

2004 ◽  
Vol 33 (1) ◽  
pp. 145-181 ◽  
Author(s):  
Tarun Chordia ◽  
Bhaskaran Swaminathan
Keyword(s):  
Incomplete Information ◽  
Stock Returns ◽  
Trading Costs

scholarly journals Incomplete Information and the Liquidity Premium Puzzle

2018 ◽  
Author(s):  
Yingshan Chen ◽  
Min Dai ◽  
Luis Goncalves-Pinto ◽  
Jing Xu ◽  
Cheng Yan
Keyword(s):  
Incomplete Information ◽  
Liquidity Premium ◽  
Premium Puzzle

Oil Risk Exposure and Expected Stock Returns

2014 ◽  
Author(s):  
Peter Christoffersen ◽  
Xuhui (Nick) Pan
Keyword(s):  
Stock Returns ◽  
Risk Exposure ◽  
Expected Stock Returns

Conditional stock liquidity premium: is Warsaw stock exchange different?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Szymon Stereńczak
Keyword(s):  
Emerging Markets ◽  
Stock Returns ◽  
Stock Exchange ◽  
Emerging Market ◽  
Market Liquidity ◽  
Investment Horizon ◽  
Liquidity Premium ◽  
Stock Liquidity ◽  
Content Type ◽  
Bear Market

Purpose This paper aims to empirically indicate the factors influencing stock liquidity premium (i.e. the relationship between liquidity and stock returns) in one of the leading European emerging markets, namely, the Polish one. Design/methodology/approach Various firms’ characteristics and market states are analysed as potentially affecting liquidity premiums in the Polish stock market. Stock returns are regressed on liquidity measures and panel models are used. Liquidity premium has been estimated in various subsamples. Findings The findings vividly contradict the common sense that liquidity premium raises during the periods of stress. Liquidity premium does not increase during bear markets, as investors lengthen the investment horizon when market liquidity decreases. Liquidity premium varies with the firm’s size, book-to-market value and stock risk, but these patterns seem to vanish during a bear market. Originality/value This is one of the first empirical papers considering conditional stock liquidity premium in an emerging market. Using a unique methodological design it is presented that liquidity premium in emerging markets behaves differently than in developed markets.

Volatility Weighting over Time in the Presence of Transaction Costs

2019 ◽  
Keyword(s):  
Transaction Costs ◽  
Empirical Studies ◽  
Risk Control ◽  
Control Technique ◽  
Risk Exposure ◽  
Trading Costs ◽  
Portfolio Risk ◽  
Dynamic Risk ◽  
Weighting Strategy ◽  
Over Time

Numerous empirical studies demonstrate the superiority of dynamic strategies with a volatility-weighting-over-time mechanism. These strategies control the portfolio risk over time by adjusting the risk exposure according to updated volatility forecasts. Yet, to reap all the benefits promised by volatility weighting over time, the composition of the active portfolio must be revised rather frequently. Transaction costs represent a serious obstacle to benefiting from this dynamic risk control technique. In this article, we propose a modified volatility-weighting strategy that allows one to reduce dramatically the amount of trading costs. The empirical evidence shows that the advantages of the modified volatility-weighting strategy persist even in the presence of high transaction costs.

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 Book-to-Market Ratio, return on equity and Brazilian Stock Returns

2018 ◽  
Vol 53 (3) ◽  
pp. 324-344 ◽  
Author(s):  
Rebeca Cordeiro da Cunha Araújo ◽  
Márcio André Veras Machado
Keyword(s):  
Risk Factors ◽  
Stock Returns ◽  
Capital Market ◽  
Explanatory Power ◽  
Predictor Variable ◽  
Liquidity Premium ◽  
Future Expectations ◽  
Content Type ◽  
Return On Equity ◽  
Book To Market Ratio

Purpose This study aims to analyze the influence of future expectations of the book-to-market ratio (B/M) and return on equity (ROE) in explaining the Brazilian capital market returns. Design/methodology/approach The study analyzed the explanatory power of risk-factor approach variables such as beta, size, B/M ratio, momentum and liquidity. Findings The results show that future expectations of the B/M ratio and ROE, when combined with proxies for risk factors, were able to explain part of the variations of Brazilian stock returns. With respect to risk factors approach variables, the authors verified the existence of size and B/M effects and a liquidity premium in the Brazilian capital market, during the period analyzed. Research limitations/implications This research was limited to the non-financial companies with shares traded at Brasil, Bolsa and Balcão, from January 1, 1995 to June 30, 2015. This way, the conclusions reached are limited to the sample used herein. Practical implications The evidences herein presented can also contribute to establishing investment strategies, considering that the B/M ratio may be calculated through accounting information announced by companies. Besides, using historical data enable investors, in a specific year, to calculate the predictor variables for the B/M ratio and ROE in the next year, which enhance the explanatory power of the current B/M, when combined in the form of an aggregate predictor variable for stock returns. Originality/value The main contribution of this study to the literature is to demonstrate how the expected future B/M ratio and ROE may improve the explanatory capacity of the stock return, when compared with the variables traditionally studied in the literature.

scholarly journals How Risky Are the Options? A Comparison with the Underlying Stock Using MaxVaR as a Risk Measure

Risks ◽  
2020 ◽  
Vol 8 (3) ◽  
pp. 76
Author(s):  
Saswat Patra ◽  
Malay Bhattacharyya
Keyword(s):  
At Risk ◽  
Stock Returns ◽  
Value At Risk ◽  
Risk Measure ◽  
Stock Index ◽  
Risk Exposure ◽  
Index Options ◽  
Significance Level ◽  
Significance Levels ◽  
Better Than

This paper investigates the risk exposure for options and proposes MaxVaR as an alternative risk measure which captures the risk better than Value-at-Risk especially. While VaR is a measure of end-of-horizon risk, MaxVaR captures the interim risk exposure of a position or a portfolio. MaxVaR is a more stringent risk measure as it assesses the risk during the risk horizon. For a 30-day maturity option, we find that MaxVaR can be 40% higher than VaR at a 5% significance level. It highlights the importance of MaxVaR as a risk measure and shows that the risk is vastly underestimated when VaR is used as the measure for risk. The sensitivity of MaxVaR with respect to option characteristics like moneyness, time to maturity and risk horizons at different significance levels are observed. Further, interestingly enough we find that the MaxVar to VaR ratio is higher for stocks than the options and we can surmise that stock returns are more volatile than options. For robustness, the study is carried out under different distributional assumptions on residuals and for different stock index options.

scholarly journals State-Dependent Stock Liquidity Premium: The Case of the Warsaw Stock Exchange

2020 ◽  
Vol 8 (1) ◽  
pp. 13
Author(s):  
Szymon Stereńczak
Keyword(s):  
Stock Market ◽  
Emerging Markets ◽  
Stock Returns ◽  
Stock Exchange ◽  
Market Liquidity ◽  
Liquidity Premium ◽  
Stock Liquidity ◽  
Holding Period ◽  
State Dependent ◽  
Warsaw Stock Exchange

The effect of stock liquidity on stock returns is well documented in the developed capital markets, while similar studies on emerging markets are still scarce and their results ambiguous. This paper aims to analyze the state-dependent variance of liquidity premium in the Polish stock market. The Polish capital market may serve as a benchmark for other emerging markets in the region of Central and Eastern Europe, hence the results of this research should be of great interest for investors and policy makers in Poland and other post-communist European countries. In the empirical, study a unique empirical methodology has been applied, which guarantees the uniqueness of the results obtained. The results obtained suggest that on the Polish stock market exists stock liquidity premium, which is statistically significant, but constitutes only a small fraction of returns. It also does not increase during periods of bearish market, what results from the lengthening of average holding period when market liquidity decreases.

Value Relevance of DuPont Identity

2017 ◽  
Vol 7 (2) ◽  
pp. 48
Author(s):  
Pradeep Kumar Gupta
Keyword(s):  
Stock Returns ◽  
Value Relevance ◽  
Stock Exchange ◽  
Accounting Information ◽  
Empirical Support ◽  
Operating Efficiency ◽  
Valuation Theory ◽  
Financial Leverage ◽  
Return On Equity ◽  
Use Efficiency

This study provides an empirical support to the relevance of very prevalent and well-established almost a century ago the DuPont Identity in the context of India, one of big 10 emerging markets (Garten, 1997). The DuPont Identity, a familiar form of financial statement analysis (Soliman, 2008) for use in equity valuation (Nissim and Penman, 2001), decomposes the return on equity (ROE) into three multiplicative components: net profit margin (operating efficiency), assets turnover ratio (asset use efficiency) and equity multiplier (financial leverage). The present study is based on the valuation theory which considers the viewpoint of equity investors to empirical investigate the value relevance of accounting information (Beisland, 2009). In this study, value relevance of three measures of accounting information used in the DuPont Identity is investigated for 228 manufacturing firms listed in National Stock Exchange (NSE) of India over a period of ten years from 2006-07 to 2015-2016. The findings indicate that the firms should focus on asset use efficiency and financial leverage components of DuPont Identity since a statistically significant impact of these two components on the stock returns is found. The strategic use of asset efficiency and financial leverage inevitably ensures the operating efficiency of the firms. This empirical investigation is an addition to the value relevance literature with an important insight to the firms and the participants of stock market about the usefulness of DuPont Identity in the context of India.

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