Liquidity shocks and equilibrium liquidity premia

Huang, Ming

doi:10.1016/s0022-0531(02)00039-x

Cited by 167 publications

(110 citation statements)

References 42 publications

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“…Uncertainty about the horizon induces a higher required liquidity premium because a quick unplanned sale of illiquid assets can induce large wealth losses (through the necessary price discounts the investor concedes to unwind his position in a short period of time). Hence, our simplified model with a random horizon is consistent with the results in Koren and Szeidl (2002) and Huang (2003).…”

Section: B the Model With Stochastic Liquiditysupporting

confidence: 90%

Stock Returns and the Volatility of Liquidity

Zhang

Pereira²

2008

SSRN Journal

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This paper offers a rational explanation for the puzzling empirical fact that stock returns decrease in the volatility of liquidity. We model liquidity as a stochastic price impact process and define the liquidity premium as the additional return necessary to compensate a multi-period investor for the adverse price impact of trading. The model demonstrates that a fully rational, utility maximizing, risk averse investor can take advantage of time-varying liquidity by adapting his trades to the state of liquidity. We provide new empirical evidence supportive of the model. * We are grateful for the helpful comments of Dong

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Section: B the Model With Stochastic Liquiditysupporting

confidence: 90%

Stock Returns and the Volatility of Liquidity

Zhang

Pereira²

2008

SSRN Journal

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“…This is in contrast to the data used by many of the previous studies on corporate bond yields, which are, in many cases, based on the Warga (1997) Fixed Income Securities Database, which contains data prior to 1996, and has data on about 700 bonds. 8 See, for example, papers by Elton, Gruber, Agrawal, and Mann (2001), Huang and Huang (2003), Eom, • Our data-set contains quotes by a large number of CDS market-makers, and is thus quite inclusive and reliable.…”

Section: Data Sourcesmentioning

confidence: 99%

“…6 See Huang (2003) and Acharya and Pedersen (2005), for examples. Subrahmanyam, Chacko, and Mallik (2008).…”

mentioning

confidence: 99%

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Liquidity and Arbitrage in the Market for Credit Risk

Nashikkar¹,

Subrahmanyam

Mahanti³

2011

J. Financ. Quant. Anal.

130

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The recent credit crisis has highlighted the importance of market liquidity and its interaction with the price of credit risk. We investigate this interaction by relating the liquidity of corporate bonds to the basis between the credit default swap (CDS) spread of the issuer and the par-equivalent bond yield spread. The liquidity of a bond is measured using a recently developed measure called latent liquidity, which is defined as the weighted average turnover of funds holding the bond, where the weights are their fractional holdings of the bond. We find that bonds with higher latent liquidity are more expensive relative to their CDS contracts, after controlling for other realized measures of liquidity. Analysis of interaction effects shows that highly illiquid bonds of firms with a greater degree of uncertainty are also expensive, consistent with limits to arbitrage between CDS and bond markets, due to the higher costs of "shorting" illiquid bonds. Additionally, we document the positive effects of liquidity in the CDS market on the CDS-bond basis. We also find that several firm-level and bond-level variables related

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“…If agents are risk averse, then this liquidity-induced risk will be priced. Huang (2003) analyzes this problem, assuming two console bonds that are identical except that one is liquid and the other is illiquid, i.e., it incurs proportional transaction costs. Investors are risk averse (with CARA utility function) and have a constant income stream.…”

Section: Uncertain Trading Horizons and Liquidity Riskmentioning

confidence: 99%

Liquidity and Asset Prices

2005

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We review the theories on how liquidity affects the required returns of capital assets and the empirical studies that test these theories. The theory predicts that both the level of liquidity and liquidity risk are priced, and empirical studies find the effects of liquidity on asset prices to be statistically significant and economically important, controlling for traditional risk measures and asset characteristics. Liquidity-based asset pricing empirically helps explain (1) the cross-section of stock returns, (2) how a reduction in stock liquidity result in a reduction in stock prices and an increase in expected stock returns, (3) the yield differential between on-and off-the-run Treasuries, (4) the yield spreads on corporate bonds, (5) the returns on hedge funds, (6) the valuation of closed-end funds, and (7) the low price of certain hard-to-trade securities relative to more liquid counterparts with identical cash flows, such as restricted stocks or illiquid derivatives. Liquidity can thus play a role in resolving a number of asset pricing puzzles such as the small-firm effect, the equity premium puzzle, and the risk-free rate puzzle.

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Liquidity shocks and equilibrium liquidity premia

Cited by 167 publications

References 42 publications

Stock Returns and the Volatility of Liquidity

Stock Returns and the Volatility of Liquidity

Liquidity and Arbitrage in the Market for Credit Risk

Liquidity and Asset Prices

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