Search results
1 – 10 of 967Qin Lei and Xuewu Wang
The purpose of this paper is to provide some rational perspectives for the flight‐to‐liquidity event rather than simply attributing it to the change in investor sentiment.
Abstract
Purpose
The purpose of this paper is to provide some rational perspectives for the flight‐to‐liquidity event rather than simply attributing it to the change in investor sentiment.
Design/methodology/approach
The paper builds a model to highlight the inherent difference in investors' investment horizon, and thus their sensitivity to changes in transaction costs in the stock and bond markets. When stock market deterioration results in higher trading costs, the existing marginal investor shifts wealth to bonds instead of remaining indifferent between stocks and bonds. At the new equilibrium, there is a higher fraction of bond ownership and a longer average investment horizon among stock holders. The paper then empirically tests the model predictions using data in the US stock and bond markets.
Findings
The authors find evidence strongly supporting this paper's theoretical predictions. Days with high stock illiquidity, high stock volatility and low stock return are associated with high yield spread in the bond market. This contemporaneous linkage between the stock market and the bond market is even stronger during periods with strong net outflows from stock mutual funds and strong net inflows to money market funds. The paper also demonstrates the existence of a maturity pattern that the predicted effects, especially the effects of stock illiquidity, are much stronger over shorter maturities.
Originality/value
The finding of this model that the investment horizon of the marginal investor (and thus the equilibrium price impact in the bond market) responds to changes in market conditions contributes to the theoretical debate on whether transaction costs matter. The flow evidence strengthens our understanding of the asset pricing implications of portfolio rebalancing decisions, and the maturity effect bolsters the case for flights to liquidity/quality due to heterogeneity in investment horizon without resorting to investor irrationality or behavioral attributes. In fact, it is arguably difficult to reconcile with a behavioral explanation.
Details
Keywords
This study aims to investigate the existence of contagion between liquid and illiquid assets in the credit default swap (CDS) market around the recent financial crisis. The…
Abstract
This study aims to investigate the existence of contagion between liquid and illiquid assets in the credit default swap (CDS) market around the recent financial crisis. The authors perform analyses based on vector autoregression model and the dynamic conditional correlation model. The estimation of vector autoregression models reveals that changes in liquid CDS (LCDS) spreads lead to changes in illiquid CDS spreads at least one week ahead during the financial crisis period, whereas the leading direction is reversed during the post-crisis period. Moreover, the results are robust after controlling for structural variables which are proven as determinants of CDS spreads and are empirically supported. This study interprets that information was incorporated first into the LCDSs because of the flight-to-liquidity during the recent crisis period but there is a default contagion effect by reflecting illiquidity-induced credit risk after the crisis. Finally, the dynamic conditional correlation analysis also confirms the main results.
Details
Keywords
Abhinava Tripathi, Alok Dixit and Vipul
The purpose of this study is to systematically review and analyze the literature in the area of liquidity of financial markets. The study summarizes the key findings and…
Abstract
Purpose
The purpose of this study is to systematically review and analyze the literature in the area of liquidity of financial markets. The study summarizes the key findings and approaches and highlights the research gaps in the extant literature.
Design/methodology/approach
A variety of reputed databases are utilized to select 100 research papers, from a large pool of nearly 3,000 research papers spanning between 1972 and 2018 using systematic literature review methodology. The selected research papers are organized to provide an in-depth analysis and an account of the ongoing research in the area of liquidity. The study uses bibliometric network visualization and word-cloud analyses to compile and analyze the literature.
Findings
The study summarizes the recent approaches in the liquidity research on aspects such as methodologies followed, variables applied, sub-areas covered, and the types of economies and markets covered. The article shows that the literature on liquidity in the emerging markets (e.g. China and India) is deficient. Overall, the following research areas related to liquidity need further exploration in the context of emerging markets: liquidity beyond the best bid-ask quotes, intraday return predictability using microstructure variables (e.g. order imbalances), impact of algorithmic-trading and volatility of liquidity.
Originality/value
To the best of authors’ knowledge, in the recent past, a detailed account of the literature on liquidity has not been published. It provides a comprehensive collection and classification of the literature on the liquidity of financial markets. This would be helpful to the future researchers, academics and practitioners in the area of financial markets.
Details
Keywords
Franz Fuerst, Patrick McAllister and Petros Sivitanides
The purpose of this paper is to investigate the effect of the crisis on the pricing of asset quality attributes. This paper uses sales transaction data to examine whether flight…
Abstract
Purpose
The purpose of this paper is to investigate the effect of the crisis on the pricing of asset quality attributes. This paper uses sales transaction data to examine whether flight from risk phenomena took place in the US office market during the financial crisis of 2007-2009.
Design/methodology/approach
Hedonic regression procedures are used to test the hypothesis that the spread between the pricing of low-quality and high-quality characteristics increased during the crisis period compared to the pre-crisis period.
Findings
The results of the hedonic regression models suggest that the price spread between Class A and other properties grew significantly during the downturn.
Research limitations/implications
Our results are consistent with the hypothesis of an increased price spread following a market downturn between Class A and non-Class A offices. The evidence suggests that the relationships between the returns on Class A and non-Class A assets changed during the period of market stress or crisis.
Practical implications
These findings have implications for real estate portfolio construction. If regime switches can be predicted and/or responded to rapidly, portfolios may be rebalanced. In crisis periods, portfolios might be reweighted towards Class A properties and in positive market periods, the reweighting would be towards non-Class A assets.
Social implications
The global financial crisis has demonstrated that real estate markets play a crucial role in modern economies and that negative developments in these markets have the potential to spillover and create contagion for the larger economy, thereby affecting jobs, incomes and ultimately people’s livelihoods.
Originality/value
This is one of the first studies that address the flight to quality phenomenon in commercial real estate markets during periods of financial crisis and market turmoil.
Details
Keywords
Coupon and principal Separate Trading of Registered Interest and Principal Securities (STRIPS) maturing at the same date often trade at different yields. The paper aims to discuss…
Abstract
Purpose
Coupon and principal Separate Trading of Registered Interest and Principal Securities (STRIPS) maturing at the same date often trade at different yields. The paper aims to discuss this issue.
Design/methodology/approach
This paper analyzes for the first time the maturity structure of these differences for the US Treasury STRIPS market.
Findings
The paper surprisingly finds that short-term coupon STRIPS persistently trade at lower yields whereas long-term coupon STRIPS trade at higher yields compared to matched-maturity principal STRIPS.
Originality/value
An integrated analysis of Treasury STRIPS and the underlying notes market allows us to isolate two determinants: first, properties of the underlying notes that spill over to principal STRIPS, and second, the liquidity of coupon STRIPS measured by stripping activity and stripping volume.
Details
Keywords
There is limited discussion in the literature of the problems associated with constructing stress tests. The Credit Crunch has revealed that attention simply to haircuts to asset…
Abstract
Purpose
There is limited discussion in the literature of the problems associated with constructing stress tests. The Credit Crunch has revealed that attention simply to haircuts to asset values and resulting margin calls is insufficient. The purpose of this paper is to explore additional avenues for stress testing.
Design/methodology/approach
The paper is largely discursive.
Findings
Stress tests must look into the debt position of the firm, as well as its position and credit exposures. Not only the volume of debt but its maturity structure, callability and the indentures attached to it are extremely important.
Research limitations/implications
The paper is geared more toward management and practitioners than to academic researchers. Implications for the analysis of corporate strategy are significant.
Social implications
Stress testing is essential to the confident continuance of firms.
Originality/value
So much of the work in this area is proprietary and so little has been published on it.
Details
Keywords
Abhinava Tripathi, Vipul and Alok Dixit
This study aims to provide a systematic literature review of the research study in the area of limit order book (LOB) mechanism of trading and its implications for market…
Abstract
Purpose
This study aims to provide a systematic literature review of the research study in the area of limit order book (LOB) mechanism of trading and its implications for market efficiency. The study attempts to document the recent theoretical developments and empirical findings from the literature exhaustively and identifies the research gaps for future research.
Design/methodology/approach
The study uses seven reputable databases to select 2,514 research studies spanning over 1981-2018 (finally compressed to a pool of 103 articles, based on relevance and impact). The study uses bibliometric network visualization and text analytics to categorize and examine the literature. The chosen articles are compiled and analyzed to provide a comprehensive account of the current research on LOBs.
Findings
The recent LOB literature is summarized on various criteria as follows: sub-areas, the types of economies and markets, methodologies and the LOB measures. The review identifies a dearth of studies on the LOBs in emerging markets. It suggests the potential research areas as intraday studies in emerging LOB markets; application of market indicators based on deeper levels of LOB, beyond the best prices; market fragmentation, order routing decision and its impact on order execution quality; optimal display of LOB levels; liquidity dynamics in quote-driven markets vis-à-vis LOB markets; effect of high-frequency trading on market microstructure; application of advanced techniques (e.g. machine learning models, zero-intelligent models); relationship between the trading speed, order aggressiveness, shape and resilience of the order book and informed trading; and information content of the auxiliary order submission strategies, including cancellation, amendments and hidden orders.
Originality/value
For the past 15 years, to the best of the knowledge, a comprehensive review of the literature on LOBs has not been published. The financial markets have transformed significantly over this period, driven by the adoption of LOBs, low latency trading and technological advancements in information dissemination. This article provides an extensive collection and classification of the literature on LOBs. This would be useful for the practitioners, future researchers and academics in the area of financial markets.
Details
Keywords
Haitao Li, Chunchi Wu and Jian Shi
The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads.
Abstract
Purpose
The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads.
Design/methodology/approach
Using a systematic liquidity factor extracted from the yield spreads between on- and off-the-run Treasury issues as a state variable, the authors jointly estimate the default and liquidity spreads from corporate bond prices.
Findings
The authors find that the liquidity factor is strongly related to conventional liquidity measures such as bid-ask spread, volume, order imbalance, and depth. Empirical evidence shows that the liquidity component of corporate bond yield spreads is sizable and increases with maturity and credit risk. On average the liquidity spread accounts for about 25 percent of the spread for investment-grade bonds and one-third of the spread for speculative-grade bonds.
Research limitations/implications
The results show that a significant part of corporate bond spreads are due to liquidity, which implies that it is not necessary for credit risk to explain the entire corporate bond spread.
Practical implications
The results show that returns from investments in corporate bonds represent compensations for bearing both credit and liquidity risks.
Originality/value
It is a novel approach to extract a liquidity factor from on- and off-the-run Treasury issues and use it to disentangle liquidity and credit spreads for corporate bonds.
Details
Keywords
Aleem Ansari and Valeed Ahmad Ansari
The purpose of this study is to empirically examine the presence of herding behavior of Indian investors using daily sample data drawn from the Standard and Poor's (S&P) Bombay…
Abstract
Purpose
The purpose of this study is to empirically examine the presence of herding behavior of Indian investors using daily sample data drawn from the Standard and Poor's (S&P) Bombay Stock Exchange-500 Index over the period 2007–2018.
Design/methodology/approach
The study employs the model proposed by Chang et al. (2000), taking stock return dispersion as a measure to capture herding. The empirical results demonstrate the absence of herding behavior in all market states, that is, normal, up and down market conditions for the overall period.
Findings
Contrastingly, the study found negative herding behavior, which underlines that individuals are taking the decision away from the market consensus. The subperiod analysis corroborates the negative herding behavior. The results remain invariant across large, mid and small-capitalization firms except in one year, that is, 2009 for small firms. While using liquidity and sentiment as variables to examine herding, the study finds some evidence of herding behavior for high market liquidity state and sentiment. The findings of negative herding shed new light on herding behavior in the Indian stock market.
Originality/value
This pattern of behavior may indicate irrationality of investor behavior and the presence of noise traders who mistrust market-wide information. Behavioral factors such as overconfidence may explain this pattern of behavior.
Details
Keywords
Carlos Contreras and Julio Angulo
The purpose of this paper is to propose a Clarke-Groves Tax (CGT) type as a remedy to the criticism that the implementation of Eurobonds has raised regarding the risk of…
Abstract
Purpose
The purpose of this paper is to propose a Clarke-Groves Tax (CGT) type as a remedy to the criticism that the implementation of Eurobonds has raised regarding the risk of undermining fiscal discipline. In this model, a government minimizes its sovereign debt-to-GDP ratio in a given period and decides whether to join a common sovereign debt club. In doing so, it exposes itself to a positive or negative tax burden while benefiting from the liquidity premium involved in creating a secure asset. The authors found that the introduction of this tax may prevent free riding behaviours if Eurobonds were to be implemented. To illustrate this, the authors provide some numerical simulations for the Eurozone.
Design/methodology/approach
In the model presented, a government which optimizes a social utility function decides whether to join the common debt club.
Findings
The adoption of the proposed tax could prevent free-riding behaviours and, therefore, encourages participation by those countries with lower debt levels that would have not otherwise taken part in this common debt mechanism. Under certain circumstances, we can expect the utility of all members of this club to improve. The bias in the distribution of gains might be mitigated by regulating the tax rule determining the magnitude of payment/reward. The proportion of the liquidity premium, arising from the implementation of a sovereign safe asset, has a decisive impact on the degree of the governments’ utility enhancement.
Research limitations/implications
The adoption of a CGT would require Eurobonds club members to reach an agreement on “the” theoretical model for determining the sovereign debt yield. One of the limitations of this model is considering the debt-to-GDP ratio as the sole determinant of public debt yields. Moreover, the authors assumed the relationship between the debt-to-GDP ratio and funding costs to be identical for all countries. Any progress in the implementation of the proposed transfer scheme would require a more realistic and in-depth analysis.
Practical implications
A new fiscal rule based on compensating countries with lower public debt levels could be a way to mitigate free-riding problems if a Eurobond mechanism is to be established.
Originality/value
This fiscal rule has not been proposed or analysed before in a context such as that considered by this paper.
Details