We analyze the optimal execution problem of a portfolio manager trading multiple assets. In addition to the liquidity and risk of each individual asset, we consider cross asset interactions in these ...two dimensions, which substantially enriches the nature of the problem. Focusing on the market microstructure, we develop a tractable order book model to capture liquidity supply/demand dynamics in a multiasset setting, which allows us to formulate and solve the optimal portfolio execution problem. We find that cross asset risk and liquidity considerations are of critical importance in constructing the optimal execution policy. We show that even when the goal is to trade a single asset, its optimal execution may involve transitory trades in other assets. In general, optimally managing the risk of the portfolio during the execution process affects the time synchronization of trading in different assets. Moreover, links in the liquidity across assets lead to complex patterns in the optimal execution policy. In particular, we highlight cases where aggregate costs can be reduced by temporarily “overshooting” one’s target portfolio.
This paper was accepted by Jerome Detemple, finance.
Globalization of corporate risk taking Bruno, Valentina; Shin, Hyun Song
Journal of international business studies,
09/2014, Volume:
45, Issue:
7
Journal Article
Peer reviewed
We explore how the interconnected nature of global finance affects corporate risk taking. We show that a common global factor known to be associated with fluctuations in cross-border banking is also ...strongly associated with common comovements in corporate risk-taking across a diverse universe of international firms. Our study contributes to the international business literature as the first comprehensive investigation of how global financial conditions induce greater synchronization of risk-taking across regions and sectors.
This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to ...aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liquidity beta is robust to the effects of default and term betas, liquidity level, and other bond characteristics, as well as to different model specifications, test methodologies, and a variety of liquidity measures. The results suggest that liquidity risk is an important determinant of expected corporate bond returns.
The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately ...insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistic, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity, and analyzes how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyzes optimal combinations thereof; it stresses the need for macro-prudential policies.
•I show that there is in general a positive relationship between the volatility of liquidity and returns for large capitalization cryptocurrencies.•This effect indicates that investors demand ...compensation for liquidity risk.•The effect is not present for the most liquid and popular cryptocurrency; Bitcoin.•Increasing liquidity over time in cryptocurrencies is found, though with a high variation over time.
In this paper I document a positive relation between the volatility of liquidity and expected returns. Specifically, I analyze the relationship between the idiosyncratic volatility of market liquidity and the returns of the five largest cryptocurrencies by market capitalization. I find that the correlation between liquidity volatility and returns is overall significantly positive, but highly time-varying. This implies that investors demand a premium for a high variation in liquidity volatility. I furthermore find that the correlation between returns and the level of liquidity is mostly positive, thus, when liquidity is low, expected returns are high. The results corroborates results from other financial markets.
Do stock prices of publicly listed companies respond to changes in transaction costs? Using the SEC’s pilot program that increased the tick size for approximately 1,200 randomly chosen stocks, we ...find a stock price decrease between 1.75% and 3.2% for small spread stocks affected by the larger tick size relative to a control group. We find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease. We study channels of price variation due to changes in expected returns: information risk, investor horizon, and liquidity risk. The evidence suggests that trading frictions affect the cost of capital.
We use three facets of freedom of choice (opportunity, decisional autonomy, and immunity from interference) to develop a freedom of choice index for 46 countries and test its impact on commonality in ...liquidity. We find that the three aspects of individual freedom of choice are negatively related to country-specific market liquidity commonality. Building on Sen’s (1993) theoretical framework, we document that in the presence of opportunities for making independent choices, immunity from encroaching activities, and decisional autonomy, investors tend to show less correlated trading decisions, measured by the levels of liquidity co-movement. To address possible endogeneity bias, we use 9/11 and country-level terrorist attacks as an exogenous source of variations to personal freedom of choice. We find that higher levels of perceived threats in a country restrain personal freedoms and tend to reduce freedom of choice effects on liquidity commonality. Our results are robust to alternative explanations, freedom of choice definitions, and model specifications.
We examine the microstructure of liquidity provision in the COVID-19 corporate bond liquidity crisis. During the two weeks leading up to Federal Reserve System interventions, volume shifted to liquid ...securities, transaction costs soared, trade-size pricing inverted, and dealers, particularly non-primary dealers, shifted from buying to selling, causing dealers’ inventories to plummet. Liquidity provisions in electronic customer-to-customer trading increased, though at prohibitively high costs. By improving dealer funding conditions and providing a liquidity backstop, the Primary Dealer Credit Facility and the Secondary Market Corporate Credit Facility (SMCCF) stabilized trading conditions. Most of the impact of SMCCF on bond liquidity seems to have materialized following its announcement. We argue that the Federal Reserve's actions reflect a new role as market maker of last resort.
The objective of this study is to examine the liquidity (LQD) determinants of Indian listed commercial banks. The study has applied both GMM and pooled, fixed and random effect models to a panel of ...37 commercial banks listed on the Bombay Stock Exchange (BSE) in India for the period from 2008 to 2017. The banks' LQD was taken as a dependent variable which functioned against both bank-specific and macroeconomic determinants. The results indicated that among the bank-specific factors, bank size, capital adequacy ratio, deposits ratio, operation efficiency ratio, and return on assets ratio are found to have a significant positive impact on LQD, while assets quality ratio, assets management ratio, return on equity ratio, and net interest margin ratio are found to have a significant negative impact on LQD. With respect to macroeconomic factors, the results indicated that interest rate and exchange rate are found to have a significant effect on LQD. The Reserve Bank of India (RBI) should give benchmarks for the above mentioned ratios to achieve smooth LQD of commercial banks in India. The study recommended that bankers should consider assets quality in such a way that improves banks' performance. Finally, the current study provides useful insights for bankers, analysts, regulators, investors, and other interested parties on the LQD of listed commercial banks.
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