Liquidity Proxies Research Articles

The Effect of Liquidity Risk on Stock Returns: The Case of Amman Stock Exchange during (2004-2013)

This study examines the effect of individual stock liquidity on its rate of return for the companies listed in Amman Stock Exchange over the period (2004-2013). Our date consists of daily observations of a sample of 30 companies have been selected on a certain filtering process. Fixed effect panel regression analysis is used for estimation purposes. The results of the study show a highly significant effect of liquidity on stock returns. The results also indicate that all the liquidity proxies that have been used in this study including (absolute bid-ask spread, proportional bid-ask spread, volume, dinar volume, turnover, Amihud (2002) illiquidity ratio, depth, dinar depth) show statistically significant effect on individual stock returns for the companies listed in ASE over the study period. Amihud (2002) Illiquidity ratio and turnover rate have the most dominant effect.

(A Study on Liquidity as an Investment Style in the Korean Stock Market)

Korean Abstract: 본 연구에서는 그동안 거래비용 등을 이유로 투자 스타일로 주목받지 못했던, 유동성이 투자 스타일로 활용될 수 있는지를 국내주식시장을 대상으로 대표적인 투자 스타일인 기업규모, 가치와 함께 분석하였다. 실증분석 결과, 저 유동성 포트폴리오의 평균수익률은 소규모 기업 포트폴리오, 가치주 포트폴리오의 그것에 비해 낮았지만 총위험을 의미하는 표준편차 또한 소규모 기업 포트폴리오, 가치주 포트폴리오의 그것에 비해 낮게 나타났다. 그리고 유동성의 대용치로 거래 회전율을 사용한 경우에 비해 Amihud(2002)의 유동성 측정치를 사용한 경우에서 보다 높은 평균수익률을 보였다. 또한 직전 월의 유동성을 이용하여 매월 포트폴리오를 갱신하는 방식보다는 직전 연도의 유동성을 이용하여 매년 포트폴리오를 갱신하는 방식의 성과가 더 우수하였다. 대표적인 투자 스타일인 기업규모, 가치와 함께 유동성을 이중정렬하여 소규모-저 유동성, 가치주-저 유동성 포트폴리오를 형성한 분석에서는 평균수익률에서 뿐만 아니라 CAPM, Fama-French 모형을 이용한 성과평가에서 모두 소규모-저 유동성 전략이 가치주-저 유동성 전략보다 우월하게 나타났다. 기간을 구분한 분석에서는 외환위기 이전보다 이후에서 높은 성과를 나타내었다. 이러한 결과들은 국내주식시장에서 유동성이 기업규모, 가치와 함께 투자 스타일로 활용될 수 있다는 것을 시사한다. 이를 바탕으로 자산운용업계에서는 저 유동성 지수를 추종하는 금융상품에 대한 개발도 이루어질 수 있을 것으로 보인다. English Abstract: We investigated whether liquidity, which has not gained much attention as an investment style due to transaction costs or other reasons, could be used as an investment style in the Korean stock market, along with the well-known investment styles of size and value. An empirical analysis found that while the average return on a low liquidity portfolio was lower than that on a small size or high value stock portfolio, its standard deviation, which indicates its total risk, was also lower than those of the other two portfolios. In addition, compared with a case that used the turnover rate as a proxy of liquidity, a case that adopted the liquidity measure suggested by Amihud (2002) recorded a higher average return. Moreover, a method that renewed a portfolio every year based on the liquidity of the immediately preceding year showed greater performance than that where a portfolio was renewed by using the liquidity of the immediately preceding month. We constructed double-sort portfolios of liquidity together with size and value, which are the most representative investment styles, in order to examine a small size-low liquidity portfolio and a high value-low liquidity portfolio. As a result, it was found that the first strategy surpassed the latter one, not only in terms of the average return, but also in terms of the risk-adjusted return based on the CAPM and Fama-French model. These findings imply that liquidity can be used as an investment style in the Korean stock market, along with size and value. Based on this finding, asset management firms could develop a financial instrument that tracks low liquidity indices.

Liquidity measures throughout the lifetime of the U.S. Treasury bond

We examine the price impact of different components of liquidity throughout the lifetime of the U.S. Treasury bond. Using the GovPX dataset, we provide a comprehensive empirical analysis of the impact of several liquidity proxies on the relative liquidity premium of these securities. The findings show that the liquidity premium has a deterministic main age-based component. This aging effect extends beyond the simple on-the-run/off-the-run effect. There is also a stochastic component of the liquidity premium that depends on the unexpected value of microstructure-based liquidity proxies and the current market- and bond-level conditions.

Deviations in expected price impact for small transaction volumes under fee restructuring

We report on the occurrence of an anomaly in the price impacts of small transaction volumes following a change in the fee structure of an electronic market. We first review evidence for the existence of a master curve for price impact on the Johannesburg Stock Exchange (JSE). On attempting to re-estimate a master curve after fee reductions, it is found that the price impact corresponding to smaller volume trades is greater than expected relative to prior estimates for a range of listed stocks. We show that a master curve for price impact can be found following rescaling by an appropriate liquidity proxy, providing a means for practitioners to approximate price impact curves without onerous processing of tick data.

Do liquidity variables improve out-of-sample prediction of sovereign spreads during crisis periods?

This paper addresses the out-of-sample prediction of European Monetary Union yield spread changes. We extend the Longstaff and Schwartz (1995) approach by using liquidity variables, namely funding liquidity as measured by European Central Bank’s unconventional monetary policy as well as a commonly used market liquidity proxy. Our out-of-sample results highlight that the economic forecasting models outperform the autoregressive moving average benchmark during times of crisis, when liquidity-based models yield superior predictions. However, the economic models do not yield forecasting gains during the pre-crisis period. Hence, our results provide evidence for the usefulness of economic models in predicting sovereign spreads during crisis periods.

ANALISIS POTENSI RASIO CAMEL SEBAGAI INDIKATOR SINYAL KONDISI BERMASALAH BANK PERKREDITAN RAKYAT KONVENSIONAL DAERAH ISTIMEWA YOGYAKARTA

The study was conducted to determine the potential of camel ratio as an
 indicator of signal problematic conditions of Conventional Rural Bank in Yogyakarta Special Region. The data used are all the Performance Rural Banks operating in 4 (four) districts and 1 (one) city of Yogyakarta, which is listed on the Bank of Indonesia. Due dependent variable is nominal data, then test of hypothesis is done using logit regression analysis model. The results provide evidence that: Adequacy Capital Ratio (Zstatistics = -5.4477; sig. = 0.0000) as a proxy for capital potentially significant factor as an indicator of signal problematic conditions; Non Performance Loan (Z Statistics = 6.3545; sig. = 0.0000) and Depreciation Reserve of Productive Assets (Z Statistics = 3.6966; sig. = 0.0002) as a proxy for asset quality factor potentially significant as an indicator of signal problematic conditions; Profit Margin (z Statistics = -1.3183; Sig. = 0.1874) as a proxy for management factor and Return On Assets (z Statistics = 0.1402; sig. = 0, 8884) as a proxy for earnings factor is not significant as an indicator of potentially problematic conditions signal; and Loan to Deposit Ratio (z Statistics = - 4.3700; sig. = 0.0000) as a proxy for liquidity potentially significant factor as an indicator of signal problematic conditions.

Liquidity in Credit Default Swap Markets

This article explores the impact of liquidity on Credit Default Swap (CDS) spreads. We proxy for CDS liquidity using measures that capture several dimensions of liquidity. We characterize the relationship between liquidity and default swap spreads in two ways: first, we perform a panel data analysis to study the link between our liquidity proxies and CDS spreads. Our sample comprises a panel with more than 280 US firms. Second, we examine whether liquidity is priced by CDS investors by examining the interactions between our liquidity proxies and the risk premium embedded in CDS spreads. The default risk premium accounts for 40% of CDS spreads. Our results indicate that the bid-ask spread and noise measures are important factors in explaining the illiquidity of both CDS spreads and risk premia. The Fitch liquidity score and the number of contributors are poor measures of liquidity.

Analysis of crisis impact on crude oil prices: a new approach with interval time series modelling

This paper proposes two types of dummy variables for an interval regression model to assess the impact of economic shocks/crises on an interval time series (ITS), e.g. daily intervals of energy prices. We present different economic interpretations of the two types of dummy variables for an interval regression model. Particularly, we discuss how they measure the direction and magnitudes of the change of an ITS caused by an economic crisis, and develop the corresponding hypothesis tests. A main advantage of the proposed ITS modelling approach over traditional point-based methods is that it can assess the change in both the trend and volatility of an asset price process simultaneously. This is due to the informational gain of an ITS sample over a point-valued sample, e.g. closing prices, since an interval observation contains both the trend and variation information of a price process in a given period. Using the proposed interval framework, we focus on the impact of the subprime mortgage crisis in the commodity market as a case study based on the ITS of monthly crude oil future price data. Empirical results suggest a strong evidence that the subprime crisis has lowered the level/trend and increased the volatility of crude oil prices. We also show that the trend of crude oil future prices moves towards an equilibrium state driven by the variation of the price process in last period, and the speculation index, as a proxy of crude oil market liquidity, is significant in explaining the dynamics of crude oil prices. Both findings provide quantitative evidence for theoretical results in the previous literature.

How is The Volatility of Jakarta Islamic Index Stocks?

The Jakarta Islamic Index (JII) is the Islamic Index in Indonesia which is based on Sharia compliance, changes in market capitalisation and liquidity . This objective of the present study is to measure volatility of J II stocks and compare it with non-JII during 2005-2012 by using ARCH and GARCH model s. The previous studies just comparing JII with other indices, a valid conclusion cannot be drawn as most of stocks belonging to JII are also included in the other indices . Therefore in this study we split stocks listed in Indonesian stock exchange into two periods: 2005-2007 which consists of two groups: JII and Non-JII and 2008-2012 which consists of three groups: JII, Sharia and Non-Sharia based on industry sector in order to investigate which one has the lowest volatility. This study uses two proxies of liquidity for each period namely: turnover and spread due t o we use CAPM extended Fama and French and also augme nted liquidity to calculate excess return. I n the period of 2008-2012 found that there is GARCH (1,0) in which ARCH influences the volatility of return . Additionally , dummy-JII and dummy-Sharia influence negative significantly toward volatility of return as well. This finding also revealed that JII stocks have lower volatility compared to non-JII in which JII has the lowest leverage compared to Sharia and Non-Sharia. Therefore this result is consistent with the theory in which JII stocks has the lowest volatility due to their characteristic which is Sharia compliance, high market capitalization and high liquidity.

Stock market liquidity and economic cycles: A non-linear approach

This paper examines the relationship between business cycles and market wide liquidity using a non-linear approach to capture the dynamics of macroeconomic time series. Applying both the Markov switching-regime and the smooth-transition autoregressive models and various proxies for liquidity, this study presents weak evidence that liquidity fundamentals act as leading indicators of future economic conditions. Whether stock market aggregate liquidity can be exploited to predict the future state of the economy remains an open question.

Market Liquidity Risk Premia in Eurozone Government Bonds' Yield Spreads

This paper is about market liquidity risk premia in Eurozone sovereign bond spreads between 2008 and 2015. By calibrating an arbitrage-free reduced form model to the cash- and derivatives markets of each member state, we disentangle credit and market liquidity spread components in government bonds and investigate their dynamics across the Euro Area. Short-term (2Y), medium-term (5Y) and long-term (10Y) government debt is in scope of the analysis.Furthermore, the relationship between government bonds and credit default swaps (basis) is examined by cointegration analysis, where we find evidence that short-term deviations from long-term equilibria are due to temporary illiquidity premia inherent in government bond spreads. Moreover, we show that the bond markets are more important for price determination than the credit default swap markets although significant spillover from the derivatives to the cash markets is present. Finally, the paper applies regression analysis to the liquidity driven bond/CDS basis to examine the proportion of systematic and idiosyncratic determinants of market liquidity premia. We conclude that these premia are largely determined by market-wide liquidity proxies such as the pfandbrief/bund spread and the banks' funding spread whereas unconventional monetary policy and idiosyncratic factors play a minor role.

Environmental disclosure and stock market liquidity: evidence from Arab MENA emerging markets

ABSTRACTThe objective of this study is to examine the impact of environmental disclosure levels on the stock market liquidity of Arab Middle Eastern and North African (MENA) companies. For that, a self-constructed disclosure index was applied to the annual reports for the years 2010, 2011 and 2012 and the bid-ask spread was used as a proxy for stock market liquidity. Results indicate that levels of environmental disclosure in MENA companies are quite low. In addition, using a sample of 276 firm-year observations, multivariate analysis shows that the higher the level of environmental disclosure provided in the annual reports, the lower the spread between the market bid and ask prices, thereby indicating an increase in stock market liquidity.

An index-based measure of liquidity

The liquidity shocks of ’08–’09 revealed that measures of liquidity risk being used in most financial institutions turned out to be woefully inadequate. The construction of long-short portfolios based on liquidity proxies introduces errors such as extraneous risk factors and hedging error. We develop a new measure for liquidity risk using exchange-traded funds (ETFs) that attempts to minimize this error. We form a theoretically-supported measure that is long ETFs and short the underlying components of that ETF, i.e., long and short a similar set of underlying securities with the same weights. Pricing discrepancies between the long and short positions are driven by liquidity differences between the ETF and its underlying components. Constructing liquidity risk factors in a number of markets, we undertake several tests to validate our new liquidity metric. The results show that our illiquidity measure is strongly related to other measures of illiquidity, explains bond index returns, and reveals a systematic illiquidity component across fixed-income markets.

What determines stock liquidity in Australia?

ABSTRACTUsing an index of corporate governance quality (CGQ), we provide the first robust evidence of the determinants of stock liquidity in Australia. We assume that CGQ affects stock liquidity because effective governance decreases information asymmetries between insiders (e.g. managers) and outsiders (e.g. investors), as well as among outsiders, by improving information transparency of a firm. Consistent with agency theory, this study, using 435 large capitalization firms over the period from 2001 to 2008, finds a significant positive relationship between CGQ and stock liquidity, suggesting that better governed firms have a higher level of stock liquidity. These findings are robust to alternative proxies of CGQ, stock liquidity and endogeneity bias.

U.S. Experience with Futures Transactions Taxes: Effects in a Highly Intermediated Market

The transactions tax on futures sharply reduced trading volume on wheat and corn contracts during the 1920s and 1930s but had no apparent effect on volatility or market quality. I find no evidence of a tax effect on open interest: I hypothesize this is because the relative magnitude of the tax was significantly higher for intermediaries than for other participants. Instead, the tax appears to have substantially reduced intra-day trading but not longer-term positioning. Volume-related proxies of liquidity therefore exhibit a strong relation with tax rates, but other measures of market quality show no relation to tax rates. In the long-run, however, exchange members doubled the minimum tick size in order to retain a large number of market makers and offset the impact of the tax.

The impact of initial public offering lockup expirations on liquidity: Evidence from Chinese stock market

Previous empirical evidence on the liquidity effect to the lockup expiration is mixed. A sample from Chinese listed firms is adopted and contributes to better understand this effect in emerging markets. The spread and illiquidity significantly increases around lockup expiration in China. Furthermore, the liquidity reaction to firms’ disclosure quality is explicitly related. The results confirm that higher disclosure quality is significantly associated with lower abnormal spread and illiquidity impact. The effect of lockup expiration shares on liquidity proxies differs in firm disclosure quality. Identifying the factors affecting liquidity around such events may help regulators develop policies to provide investors with greater confidence in their investments.

ETF Liquidity

We document the performance of liquidity proxies in ETFs. Most proxies are developed for use in equities. However, ETFs have lower asymmetric information, more algorithmic trading, and an active primary market where units are frequently created and redeemed. Using a comprehensive database of over 600 ETFs, we find that despite the differences between ETF and stock liquidity, proxies such as Daily Spread, High-Low, Amihud, and Roll all do a good job of capturing changes in effective and quoted spread transaction costs. However, no proxies accurately reflect movements in price impact or the level of actual transaction costs.

Commonality in liquidity: Effects of monetary policy and macroeconomic announcements

After the recent financial crisis, few issues receive more attention than central banks’ actions or major macroeconomic announcements in markets. Motivated by this fact, we investigate the impact of specific macro-announcements on liquidity commonality in Turkey. Using a weighted spread constructed by a proprietary database of order flows, we reveal that among several developed countries, only U.S. monetary policy and macroeconomic announcements raise commonality in liquidity. Moreover, commonality is significantly affected (increased) only beyond the best price quotes, showing that researchers may obtain misleading results on commonality if they consider spread at the best price levels as a liquidity proxy.

Liquidity and conditional market returns: Evidence from German exchange traded funds

In the spirit of Merton (1973), we assert that temporary aggregate market illiquidity is compensated for in the form of higher conditional market returns. In order to test this hypothesis, we use two available liquidity proxies, namely versions of the Amihud illiquidity measure and a measure based on exchange traded fund prices. Our investigation is based on vector autoregressive models for the German stock market between July 2006 and June 2010. The fund-based illiquidity proxy dominates in capturing consistent results for the determination of time-varying market returns. Temporary illiquidity is indeed compensated for by higher market returns. We confirm a bidirectional relation between illiquidity and market returns, i.e. current returns depend on lagged illiquidity and current illiquidity can be determined by a combination of past returns as well as past illiquidity. The relation shows that illiquidity is persistent and driven by market declines.

Macro Liquidity Risk, Money Growth, and the Cross-Section of Stock Returns: The Case of Korea

ABSTRACTAccording to the homogeneity of money holding purpose, we decompose the broad money M2 into an underlying and a non-underlying part and propose innovations in future non-underlying M2 growth as a proxy for macro liquidity. In both the cross-sectional regression tests and the GMM tests, we find that risk related to innovations in future non-underlying M2 growth is strongly significantly priced in Korea, after controlling for the well-known risk factors and other macroeconomic variables. Meanwhile, risk related to innovations in future aggregate or underlying M2 growth is insignificantly priced. These results indicate that non-underlying M2 growth more directly affects macro liquidity than does aggregate or underlying M2 growth.