Examining the dynamics of illiquidity risks within the phases of the business cycle

Racicot, François-Éric; Rentz, William F.; Kahl, Alfred L.; Mesly, Olivier

doi:10.1016/j.bir.2018.12.001

Cited by 11 publications

(16 citation statements)

References 54 publications

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“…The profitability and investment factors are very significant (p<0.01) either calculated by OLS or GMM-IV d . The liquidity factor of OLS and GMM-IV d is not significant for any megatrends, which is mostly in line with [ 32 , 99 ].…”

Section: Resultssupporting

confidence: 70%

“…Based on our GMM-IV d estimates, the coefficients for value, investment and profitability are significant which are in contrary to Racicot et al . [ 34 , 98 , 99 ] who found that in most cases the market factor is the only variable which has significant explanatory power. The authors highlight that measurement errors may be the reason for their results.…”

Section: Resultsmentioning

confidence: 99%

“…The effect of liquidity or illiquidity is a critical factor which is clearly in the focus of researchers (see Amihud [ 96 ], Pástor and Stambaugh [ 97 ] or Racicot et al . [ 98 , 99 ]). Beyond liquidity, the applied factors are, in fact, very diverse: López-García et al .…”

Section: Methodsmentioning

confidence: 99%

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Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology

Naffa

Fain

2020

PLoS ONE

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ESG factors are becoming mainstream in portfolio investment strategies, attracting increasing fund inflows from investors who are aligning their investment values to Sustainable Development Goals (SDG) declared by the United Nations Principles for Responsible Investments. Do investors sacrifice return for pursuing ESG-aligned megatrend goals? The study analyses the risk-adjusted financial performance of ESG-themed megatrend investment strategies in global equity markets. The analysis covers nine themes for the period 2015–2019: environmental megatrends covering energy efficiency, food security, and water scarcity; social megatrends covering ageing, millennials, and urbanisation; governance megatrends covered by cybersecurity, disruptive technologies, and robotics. We construct megatrend factor portfolios based on signalling theory and formulate a novel measure for stock megatrend exposure (MTE), based on the relative fund flows into the corresponding thematic ETFs. We apply pure factor portfolios methodology based on constrained WLS cross-sectional regressions to calculate Fama-French factor returns. Time-series regression rests on the generalised method of moments estimator (GMM) that uses robust distance instruments. Our findings show that each environmental megatrend, as well as the disruptive technologies megatrend, yielded positive and significant alphas relative to the passive strategy, although this outperformance becomes statistically insignificant in the Fama-French 5-factor model context. The important result is that most of the megatrend factor portfolios yielded significant non-negative alphas; which supports our assumption that megatrend investing strategy promotes SDGs while not sacrificing returns, even when accounting for transaction costs up to 50bps/annum. Higher transaction costs, as is the case for some of these ETFs with expense ratios reaching 80-100bps, may be an indication of two things: ESG-themed megatrend investors were willing to sacrifice ca. 30-50bps of annual return to remain aligned with sustainability targets, or that expense ratio may well decline in the future.

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Section: Resultssupporting

confidence: 70%

Section: Resultsmentioning

confidence: 99%

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Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology

Naffa

Fain

2020

PLoS ONE

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“…use this approach to test the Fama-French five-factor model augmented with illiquidity measures, concluding that, in general, the most significant factor is RMRF, with measurement errors largely determining this result. On the other hand [ 34 ], use a distance instrument-based algorithm into a GMM framework, to study the impact of illiquidity on the returns of twelve sector portfolios. Consistently with [ 32 , 33 ], the authors conclude that the only relevant factor according to their dynamic GMM approach is the market risk premium.…”

Section: Data and Resultsmentioning

confidence: 99%

Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models

Rojo-Suárez

Alonso‐Conde

2020

PLoS ONE

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Most single-factor and multifactor asset pricing models constitute special cases of the consumption-based asset pricing theory, in which investors’ marginal utility is the key determinant of asset prices. However, in recent years, production-based asset pricing models have been extraordinarily successful in correctly pricing a wide range of anomaly portfolios that are typically mispriced in previous research. In parallel, research on conditioning information has contributed to significantly improve the performance of classic consumption-based asset pricing models. On this basis, in this paper we conduct an in-depth research on the performance of consumption and production-based asset pricing models on the Tokyo Stock Exchange, for the period from 1992 to 2018, in order to test to what extent consumer confidence helps consumption models to correctly capture shifts in the investment opportunity set of investors. To overcome the constraints imposed by the periodicity of macroeconomic data, we use a factor-mimicking portfolio approach that allows us to test the performance of the models into consideration at different frequencies. Our results suggest that the consumer confidence index for Japan helps consumption-based asset pricing models outperform production-based models for different anomaly portfolios. Conversely, in those cases where consumption models perform worse, the production models also perform poorly. These results help to partially reconcile the results provided by the consumption and production models, and constitute a step forward for the purpose of identifying the fundamental risk factors that drive asset prices.

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“…The robust instrumental variables (RIV) algorithm conducted by GMM (Generalized Method of Moment) was taken into consideration for correction. Racicot et al transferred FFFFM into the dynamic specification and used Kalman filtering and a recursive robust instrumental variables (IV) algorithm to detect the estimation of alpha and beta [24]. They noticed that illiquidity is a significant factor in the Kalman filter approach and that market risk premium is the only effective factor in a dynamic context based on the GMM approach.…”

Section: Fama-french Model Researchmentioning

confidence: 99%

Empirical Research on the Fama-French Three-Factor Model and a Sentiment-Related Four-Factor Model in the Chinese Blockchain Industry

Chang

Lan

et al. 2020

Sustainability

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As one of the most significant components of financial technology (FinTech), blockchain technology arouses the interests of numerous investors in China, and the number of companies engaged in this field rises rapidly. The emotion of investors has an effect on stock returns, which is a hot topic in behavioral finance. Blockchain is an essential part of FinTech, and with the fast development of this technology, investors’ sentiment varies as well. The online information that directly reflects investors’ mood could be utilized for mining and quantifying to construct a sentiment index. For a better understanding of how well some factors adequately explain the return of stocks related to blockchain companies in the Chinese stock market, the Fama-French three-factor model (FFTFM) will be introduced in this paper. Furthermore, sentiment could be a new independent variable to enhance the explanatory power of the FFTFM. A comparison between those two models reveals that the sentiment factor could raise the explanatory power. The results also indicate that the Chinses blockchain industry does not own the size effect and book-to-market effect.

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Examining the dynamics of illiquidity risks within the phases of the business cycle

Cited by 11 publications

References 54 publications

Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology

Performance measurement of ESG-themed megatrend investments in global equity markets using pure factor portfolios methodology

Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models

Empirical Research on the Fama-French Three-Factor Model and a Sentiment-Related Four-Factor Model in the Chinese Blockchain Industry

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