(Il)liquidity Premium in Credit Markets: A Myth?

2019 ◽  
Keyword(s):  
Cross Section ◽  
Risk Premium ◽  
Credit Markets ◽  
Corporate Bonds ◽  
Credit Spreads ◽  
Limited Evidence ◽  
Liquidity Premium ◽  
Multiple Measures ◽  
The Cross ◽  
Sharpe Ratios

Across multiple measures of “liquidity” and a variety of methods to control for correlated characteristics of more- (less-) liquid bonds, the authors find only limited evidence of a liquidity premium in the cross section of corporate bonds. Specifically, although illiquid bonds have slightly higher credit spreads and directionally higher average returns, portfolios that tilt toward (away from) less (more) liquid bonds exhibit considerably higher levels of volatility. Economically, the low Sharpe ratios of illiquidity factor–mimicking portfolios are hard to justify for an investor. This is puzzling, as theory suggests investors should demand a risk premium for holding less-liquid assets.

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 Labor Income, Relative Wealth Concerns, and the Cross Section of Stock Returns

2016 ◽  
Vol 51 (4) ◽  
pp. 1111-1133 ◽  
Author(s):  
Juan-Pedro Gómez ◽  
Richard Priestley ◽  
Fernando Zapatero
Keyword(s):  
Stock Returns ◽  
Cross Section ◽  
Risk Premium ◽  
Labor Income ◽  
Relative Wealth ◽  
The Cross

The finance literature documents a relation between labor income and the cross section of stock returns. One possible explanation for this is the hedging decisions of investors with relative wealth concerns. This implies a negative risk premium associated with stock returns correlated with local undiversifiable wealth because investors are willing to pay more for stocks that help their hedging goals. We find evidence that is consistent with these regularities. In addition, we show that the effect varies across geographic areas depending on the size and variability of undiversifiable wealth, proxied by labor income.

scholarly journals Tail Risk and the Cross-Section of Mutual Fund Expected Returns

2018 ◽  
Vol 54 (1) ◽  
pp. 425-447 ◽  
Author(s):  
Nikolaos Karagiannis ◽  
Konstantinos Tolikas
Keyword(s):  
Risk Factors ◽  
Cross Section ◽  
Risk Premium ◽  
Mutual Fund ◽  
Market Risk ◽  
Expected Returns ◽  
Adequate Explanation ◽  
Tail Risk ◽  
Management Fees ◽  
The Cross

We test for the presence of a tail risk premium in the cross-section of mutual fund returns and find that the top tail risk quintile of funds outperforms the bottom by 4.4% per annum. This premium is not simply a reward for market risk, nor do commonly used risk factors offer an adequate explanation. Our findings hold across double-sorted portfolios formed on tail risk and a number of fund characteristics. We also find that funds susceptible to tail risk tend to be small, young, have high management fees, and have managers who do not risk their own capital.

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