Narrow Results

We document the empirical properties of a sample of 1,765 funds in the TASS Hedge Fund database from 1977 to 2004 that are no longer active. The TASS sample shows that attrition rates differ significantly across investment styles, from a low of 5.2% per year on average for convertible arbitrage funds to a high of 14.4% per year on average for managed futures funds. We relate a number of factors to these attrition rates, including past performance, volatility, and investment style, and also document differences in illiquidity risk between active and liquidated funds. We conclude with a proposal for the US Securities and Exchange Commission to play a new role in promoting greater transparency and stability in the hedge-fund industry.

This paper studies the determinants of trading volume and liquidity of corporate bonds. Using transactions data from a comprehensive dataset of insurance company trades, our analysis covers more than 17,000 US corporate bonds of 4,151 companies over a five-year period prior to the introduction of TRACE. Our transactions data show that a variety of issue- and issuer-specific characteristics impact corporate bond liquidity. Among these, the most economically important determinants of bond trading volume are the bond’s issue size and age — trading volume declines substantially as bonds become seasoned and are absorbed into less active portfolios. Stock-level activity also impacts bond trading volume. Bonds of companies with publicly traded equity are more likely to trade than those with private equity. Further, public companies with more active stocks have more actively traded bonds. Finally, we show that while the liquidity of high-yield bonds is more affected by credit risk, interest-rate risk is more important in determining the liquidity of investment-grade bonds.

This paper investigates the link between stock market liquidity and firm value in an important emerging market, Vietnam. Specially, we examine this relationship using a sample of firms listed on the Ho Chi Minh City stock exchange for the period 2006–2014. We show that there is a negative relation between liquidity and firm value. This outcome is contrary to previous results for many developed countries. Further, we demonstrate that this result may be explained by differences in leverage effects and pricing-based theories, where stock liquidity influences firm performance via an illiquidity premium or mispricing.

In view of explosive trends and excessive trades in the cryptocurrency markets, this paper contributes to the existing literature by bringing in the limelight the effect of liquidity on the herding behavior in the cryptocurrency market. Results from a first applied herding model including contemporaneous and lagged squared market returns demonstrated that market-wide herding exists within falling markets. The incorporation of liquidity highlights further evidences on herding behavior across cryptocurrencies during high and low liquid days, which varies across percentiles. Our findings bring handy implications for topics of portfolio and risk management, as well as regulation.

This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In terms of expected returns, the total estimated liquidity risk premium is around 0.6% per annum for US long-maturity investment grade bonds. For speculative grade bonds, which have higher exposures to the liquidity factors, the liquidity risk premium is around 1.5% per annum. We find very similar evidence for the liquidity risk exposure of corporate bonds for a sample of European corporate bond prices.

I propose a friction measure of bond round-trip liquidity costs that is robust to outliers and accounts for the idiosyncratic information behind trading decisions. Particularly effective with investment-grade bonds, the proposed measure displays properties consistent with the credit risk puzzle. Using transactions from January 2004 to December 2011, I find that liquidity costs display a strong correlation with credit conditions and peaked during the sub-prime crisis. After controlling for equity volatility with high-frequency measures, liquidity costs explain a substantial fraction of the variation in the yield spreads of highly rated bonds, but become less important for speculative-grade bonds.

Hendershott et al. (2011, Does Algorithmic Trading Improve Liquidity? Journal of Finance 66, 1–33) show that algorithmic traders improve liquidity in equity markets. An equally important and unanswered question is whether they improve liquidity when information asymmetry is high. We use days surrounding earnings announcement as a period of high information asymmetry. First, we follow Hendershott et al. (2011, Does Algorithmic Trading Improve Liquidity? Journal of Finance 66, 1–33) to use introduction of NYSE autoquote as a natural experiment. We find that increased algorithmic trading (AT) as a result of NYSE autoquote does not improve liquidity around earnings announcements. Next, we use trade-to-order volume % and cancel rate as a proxy for algorithmic trading and find that abnormal spreads surrounding the days of earnings announcement are significantly higher for stocks with higher AT. Our findings indicate that algorithmic traders reduces their role of liquidity provision in markets when information asymmetry is high. These findings shed further light on the role of liquidity provision by algorithmic traders in the financial markets.

A growing volume of studies indicate that the information asymmetry problem is a serious issue which significantly hinders stock market development. This problem is more pronounced in emerging markets with weak institutions. The domination of large shareholders in a firm might be a cause of information asymmetry because they are commonly believed to have access to private and value-relevant information. The current paper offers insight into the relationship between multiple large shareholder ownership and stock market information asymmetry in the context of Vietnam, an important emerging market. Employing fixed effects and GMM estimators for a panel data sample of firms listed on the Ho Chi Minh City stock exchange covering the period 2007–2015, the results suggest that the concentration of large shareholder ownership is positively and significantly associated with information asymmetry. This finding has strong implications for policy making process in promoting stock market development.

We estimate the non-default component of corporate bond yield spreads and examine its relationship with bond liquidity. We measure bond liquidity using intraday transactions data and estimate the default component using the term structure of credit default swaps (CDS) spreads. With swap rate as the risk free rate, the estimated non-default component is generally moderate but statistically significant for AA-, A-, and BBB-rated bonds and increasing in this order. With Treasury rate as the risk free rate, the estimated non-default component is the largest in basis points for BBB-rated bonds but, as a fraction of yield spreads, it is the largest for AAA-rated bonds. Controlling for the unobservable firm heterogeneity, we find a positive and significant relationship between the non-default component and illiquidity for investment-grade bonds but no significant relationship for speculative-grade bonds. We also find that the non-default component comoves with indicators for macroeconomic conditions.

This empirical study on European stocks gives evidence about the practices of high frequency traders (HFTs) under market stress. In the absence of significant news, whatever the market conditions, they are the main contributors to liquidity with a participation of 80% in the market depth. They constitute 60% of the traded amounts, with an aggressive/passive ratio around 53%. We identify a change of regime in the presence of scheduled news that goes beyond the expected reaction to volatility variations. Moreover, in extreme situations, when non-HFTs have time to adjust their tactics, they act as liquidity providers in place of HFTs.

The new MiFID II regulation put in place in January 2018 has deeply modified the microstructure of European financial markets. In particular, new tick size tables have been created, leading to tick size modifications for hundreds of assets. In this work, we investigate the relevance of this new tick size regime for the assets traded on Euronext. To do so, we analyze the changes of transaction costs paid by investors under this new regulation. We find that from this viewpoint, MiFID II clearly induced an improvement of market quality.

This paper investigates the relationship between volatility and liquidity on the German electricity futures market based on high-frequency intraday prices. We estimate volatility by the time-weighted realized variance acknowledging that empirical intraday prices are not equally spaced in time. Empirical evidence suggests that volatility of electricity futures decreases as time approaches maturity, while coincidently liquidity increases. Established continuous-time stochastic models for electricity futures prices involve a growing volatility function in time and are thus not able to capture our empirical findings a priori. In Monte Carlo simulations, we demonstrate that incorporating increasing liquidity into the established models is key to model the decreasing volatility evolution.

We study the effects of considering different criteria simultaneously on portfolio optimization. Using a single-period optimization setting, we use various combinations of expected return, variance, liquidity and Conditional Value at Risk criteria. With stocks from Borsa Istanbul, we make computational studies to show the effects of these criteria on objective and decision spaces. We also consider cardinality and weight constraints and study their effects on the results. In general, we observe that considering alternative criteria results in enlarged regions in the efficient frontier that may be of interest to the decision maker. We discuss the results of our experiments and provide insights.

We establish a link between illiquidity and positive autocorrelation in asset returns among a sample of hedge funds, mutual funds, and various equity portfolios. For hedge funds, this link can be confirmed by comparing the return autocorrelations of funds with shorter vs. longer redemption-notice periods. We also document significant positive return-autocorrelation in portfolios of securities that are generally considered less liquid, e.g., small-cap stocks, corporate bonds, mortgage-backed securities, and emerging-market investments. Using a sample of 2,927 hedge funds, 15,654 mutual funds, and 100 size- and book-to-market-sorted portfolios of US common stocks, we construct autocorrelation-sorted long/short portfolios and conclude that illiquidity premia are generally positive and significant, ranging from 2.74% to 9.91% per year among the various hedge funds and fixed-income mutual funds. We do not find evidence for this premium among equity and asset-allocation mutual funds, or among the 100 US equity portfolios. The time variation in our aggregated illiquidity premium shows that while 1998 was a difficult year for most funds with large illiquidity exposure, the following four years yielded significantly higher illiquidity premia that led to greater competition in credit markets, contributing to much lower illiquidity premia in the years leading up to the Financial Crisis of 2007–2008.

The electronic limit order book has transformed securities markets. Advantages of speed, simplicity, scalability, and low costs drive the rapid adoption of this mechanism to trade equities, bonds, foreign exchange, and derivatives worldwide. But limit order book systems depend primarily on public limit orders to provide liquidity, raising natural questions regarding the resiliency of the mechanism under stress. This paper provides an analysis of the stochastic dynamics of liquidity and its relation to volatility shocks using data from a futures market. Aggregate market liquidity exhibits considerable variation, and is inversely related to volatility, as predicted by our model. However, liquidity shocks dissipate quickly, indicating a high degree of market resiliency. This fact has important practical implications, particularly as regards to institutional trading, and market protocols. We explore these practical issues in detail.

In this paper, we analyze cross-sectional heterogeneity in the time-series variation of liquidity in equity markets. Our analysis uses a broad time-series and cross-section of liquidity data. We find that average daily changes in liquidity exhibit significant heterogeneity in the cross-section; the liquidity of small firms varies more on a daily basis than that of large firms. A steady increase in aggregate market liquidity over the past decade is more strongly manifest in large firms than in small firms. Absolute stock returns are an important determinant of liquidity. We investigate cross-sectional differences in the resilience of a firm's liquidity to information shocks. We use the sensitivity of stock liquidity to absolute stock returns as an inverse measure of this resilience, and find that the measure exhibits considerable cross-sectional variation. Firm size, return volatility, institutional holdings, and volume are all significant cross-sectional determinants of this measure.

This paper investigates basis spreads on index futures listed on the Taiwan Futures Exchange. We analyze the role of speculators and of informed trading in Taiwan's futures market using intraday data during the five-day pre-expiration period. We demonstrate that liquidity, volatility, and informed trading are each significantly positively related to spread magnitude, indicating that speculators may dominate arbitrageurs. While spreads have narrowed as the market has matured, liquidity and informed trading continue to widen spreads despite the fact that a naïve arbitrage strategy outperforms the market.

This paper examines the relationship between liquidity and profitability of the non-financial firms listed in Dhaka Stock Exchange (DSE) for the period of 1998–2013. Pedroni and Johansen co-integration results show that liquidity, profitability, firm size and long-term debt (LTD) have significant co-integration relationship in the long run. The causality test results expose that a strong bidirectional casual relationship exist among the variables of liquidity and profitability, LTD and liquidity profitability and firm size in the short run. Also, there exists unidirectional causality among the variables of firm size and liquidity, profitability and LTD in the short run. Furthermore, Pooled Mean Group results show that profitability, firm size and LTD have long-run co-integration relationship with liquidity. However, in the short run, profitability and LTD significantly contribute to the liquidity and the error correction mechanism shows that speed of adjustment to equilibrium is significant within the year. Impulse response analysis indicates shocks in the firm size, LTD and profitability have positive and significant impact on liquidity.

I examine whether a short-term reversal is attributed to past intraday or overnight price movements. The results show that intraday returns significantly reverse in the following week, while overnight returns do not, indicating that the short-term reversal is attributed to past intraday price movements. In addition, the reversal of intraday returns is stronger for more illiquid stocks and during more volatile market conditions, while the reversal is unaffected by fundamental news. This result supports the view that short-term reversals are attributable mainly to price concessions for liquidity providers to absorb intraday uninformed transactions, rather than intraday price reactions to fundamental information.

This study attempts primarily to measure the financial performance of banking industry of Bangladesh for the periods 2013–2014 and to rate them according to the composite rating system. For this purpose, 10 private commercial banks (PCBs) have been selected from 38 PCBs. CAMEL has critically analyzed the financial performance of these banks. This finds that most of the banks get 2.14 with an average rating of composite range, where only Eastern Bank Ltd. gets “Strong” rating, seven PCBs get “Satisfactory” rating, AB Bank Ltd. and City Bank Ltd. lay middle of the range of composite score. From this ground, it is clearly reflected that most of the PCBs in Bangladesh have performed quite satisfactorily in recent years. The performance of most banks is dependent more on the managerial ability in formulating strategic plans and the efficient implementation of its strategies. Maintenance of asset quality is the major challenge in this year and is feared to remain so in 2014. The banking sector in Bangladesh has passed somewhat an average year regarding governance, profitability and soundness in 2013. Finally, it is recommended that the banks should be more careful to ensure the quality of assets and its uses, and increased their efficiency in managerial grids.