Goyenko, Ruslan and Sarkissian, Sergei (2010): Flight to Liquidity and Global Equity Returns.
Download (210kB) | Preview
Investment practice and academic literature suggest a great degree of interaction between the world’s stock markets and most liquid and safe assets, such as U.S. Treasuries. Using data from 46 markets and a 30-year time period, we examine the impact of “flight-to-liquidity” events on global asset valuation. This wide cross-sectional and time-series sample provides a natural setting for analyzing the link between changes in the illiquidity of Treasuries and expected equity returns. Our illiquidity measure is the average percentage bid-ask spread of off-the-run U.S. Treasury bills with maturities of up to one year. We find that this proxy predicts stock market illiquidity and future equity returns in both developed and emerging markets. This predictive relation remains intact after controlling for various world and country-level variables. Asset pricing tests further reveal that Treasury bond illiquidity is a significantly priced factor even in the presence of other conventional risks, such as those of the world stock market, foreign exchange, local equity market variance and illiquidity, as well as the term spread. Our results indicate that flight-to-liquidity risk is an important determinant of returns in global equity markets.
|Item Type:||MPRA Paper|
|Original Title:||Flight to Liquidity and Global Equity Returns|
|English Title:||Flight to Liquidity and Global Equity Returns|
|Keywords:||Cross-asset integration; Flight-to-quality; Illiquidity beta; International asset pricing; Monetary policy|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
|Depositing User:||Sergei Sarkissian|
|Date Deposited:||20. Dec 2010 19:34|
|Last Modified:||23. Feb 2015 14:28|
Acharya, V., and L. Pedersen, 2005, Asset pricing with liquidity risk, Journal of Financial Economics 77, 375-410. Acharya, V, Amihud, Y., and S. Bharath, 2009, Liquidity risk of corporate bond returns, NYU working paper. Agnew J., and P. Balduzzi, 2007, Transfer activity in 401(k) plans, Working paper, Boston College. Amihud, Y., and H. Mendelson, 1986, Asset pricing and the bid-ask spread, Journal of Financial Economics 17, 223-249. Amihud, Y., 2002, Illiquidity and stock returns: Cross-section and time-series effects, Journal of Financial Markets 5, 31–56. Andersen, T.G., and B. Sørensen, 1996, GMM estimation of a stochastic volatility model: A Monte Carlo study, Journal of Business and Economic Statistics 14, 328-352. Andrews, D., and J. Monahan, 1992, An improved heteroskedasticity and autocorrelation consistent covariance matrix estimator, Econometrica 60, 953-966. Ang, A., and G. Bekaert, 2002, International asset allocation with regime shifts, Review of Financial Studies 15, 1137-1187. Ang, A., and J. Chen, 2002, Asymmetric correlations of equity portfolios, Journal of Financial Economics 63, 443-494. Baele, L., G. Bekaert, and K. Inghelbrecht, 2010, The determinants of stock and bond return comovements, Review of Financial Studies 23, 2374-2428. Beber, A., M. Brandt, and K. Kavajecz, 2007, Flight-to-quality or Flight-to-liquidity? Evidence from the Euro-area bond market. Review of Financial Studies, forthcoming Bekaert, G., and C. Harvey, 1995, Time-varying world market integration, Journal of Finance 50, 403-444. Bekaert, G., E. Engstrom, and S. Grenadier, 2005, Stock and bond returns with Moody investors. Working paper, Columbia University. Bekaert, G., C. Harvey, and C. Lundblad, 2007, Liquidity and expected returns: Lessons form emerging markets. Review of Financial Studies 20, 1783-1832. Bekaert, G., C. Harvey, C. Lundblad, and S. Siegel, 2008, What segments equity markets? Working paper, Duke University. Benston, G., and R. Hagerman, 1974, Determinants of bid-ask spreads in the over-the-counter market, Journal of Financial Economics 1, 353-364. Bernanke, B., and M. Gertler, 1995, Inside the black box: The credit channel of monetary policy transmission, Journal of Economic Perspectives 9, 27-48. Bernarke, B., and K. Kuttner, 2005, What explains the stock market's reaction to Federal Reserve policy? Journal of Finance 60, 1221–1257. Breen,W., L. Glosten, and R. Jagannathan, 1989, Economic significance of predictable variations in stock index returns, Journal of Finance 44, 1177-1190. Brennan, M., and A. Subrahmanyam, 1996, Market microstructure and asset pricing: On the compensation for illiquidity in stock returns, Journal of Financial Economics 41, 441-464. Campbell, J., 1987, Stock returns and the term structure, Journal of Financial Economics 18, 373-399. Campbell, J., and J. Ammer, 1993, What moves the stock and bond markets? A variance decomposition for long-term asset returns, Journal of Finance 48, 3-37. Carrieri, F., V. Errunza, and K. Hogan, 2007, Characterizing world market integration through time, Journal of Financial and Quantitative Analysis 42, 915-940. Chan, K.C., G.A. Karolyi, and R. Stulz, 1992, Global financial markets and the risk premium on U.S. equity, Journal of Financial Economics 32, 137-167. Chen, N.-F., R. Richard, and S. Ross, 1986, Economic forces and the stock market, Journal of Business 59, 383-403. Chordia, T., R. Roll, and A. Subrahmanyam, 2001, Market liquidity and trading activity, Journal of Finance 56, 501-530. Chordia, T., A. Sarkar, and A. Subrahmanyam, 2005, An empirical analysis of stock and bond market liquidity, Review of Financial Studies 18, 85-129. Connolly, R., C. Stivers, and L. Sun, 2005, Stock market uncertainty and the stock-bond return relation, Journal of Financial and Quantitative Analysis 40, 161-194. De Santis, G., and B. Gerard, 1997, International asset pricing and portfolio diversification with time-varying risk, Journal of Finance 52, 1881-1912. Diamond, D., and P. Dybvig, 1983, Bank runs, deposit insurance, and liquidity, Journal of Political Economy 91, 401-419. Djankov, S., R. La Porta, F. Lopez-de-Silanes, and A. Shleifer, 2008, The law and economics of self-dealing, Journal of Financial Economics 88, 430-465. Dumas, B., and B. Solnik, 1995. The world price of foreign exchange risk, Journal of Finance 50, 445-479. Engle, R., 2002, Dynamic conditional correlation - a simple class of multivariate GARCH models, Journal of Business and Economic Statistics 20, 339-350. Engle, R., and K. Kroner, 1995, Multivariate simultaneous generalized ARCH. Econometric Theory 11, 122–150. Ericson, J., and O. Renault, 2006, Liquidity and credit risk, Journal of Finance 61, 2219-2250. Errunza, V., and E. Losq, 1985, International asset pricing under mild segmentation: Theory and test, Journal of Finance 40, 105-124. Fama, E., and G.W. Schwert, 1977, Asset returns and inflation, Journal of Financial Economics 5, 115-146. Fama, E., and K.R. French, 1993, Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, 3-56. Fama, E., and K.R. French, 1998, 1998, Value versus growth: The international evidence, Journal of Finance 53, 1975-1999. Ferson W., and S. Foerster, 1994, Finite sample properties of the generalized method of Moments in tests of conditional asset pricing models, Journal of Financial Economics 36, 29-55. Ferson, W. and C.R. Harvey, 1993, The risk and predictability of international equity returns, Review of Financial Studies 6, 527-566. Ferson, W., S. Sarkissian, and T. Simin, 2003, Spurious regressions in financial economics? Journal of Finance 58, 1393-1413. Fleming, J., Kirby, C., Ostdiek, B., 1998, Information and volatility linkages in the stock, bond and money markets, Journal of Financial Economics 49, 111-137. Fogler, H., J. Kose, and J. Tipton, 1981, Three factors, interest rate differentials and stock groups, Journal of Finance 36, 323-335. Goetzmann, W.N., and M. Massa, 2002, Daily momentum and contrarian behavior of index fund investors, Journal of Financial and Quantitative Analysis 37, 375-389. Goyenko, R., 2006, Stock and bond pricing with liquidity Risk. Working paper, McGill University. Goyenko, R., C. Holden, and C. Trzcinka, 2009, Do liquidity measures measure liquidity?, Journal of Financial Economics 92, 153-181. Goyenko, R., and A. Ukhov, 2009, Stock and bond market liquidity: A long-run empirical analysis, Journal of Financial and Quantitative Analysis 44, 189-212. Goyenko, R., A. Subrahmanyam, and A. Ukhov, 2009, The term structure of bond market liquidity, Journal of Financial and Quantitative Analysis, forthcoming. Griffin, J., 2002, Are the Fama French factors global or country specific, Review of Financial Studies 15, 1121-1152. Hameed, A., W. Kang, and S. Viswanathan, 2010, Stock market declines and liquidity, Journal of Finance 65, 257-293. Harvey, C., 1991. The world price of covariance risk, Journal of Finance 46, 111-157. Hasbrouck, J., 2009, Trading costs and returns for US equities: Estimating effective costs from daily data, Journal of Finance 64, 1445-1477. Ho, T., and H. Stoll, 1983, The dynamics of dealer markets under competition, Journal of Finance 38, 1053-1074. Karolyi, G.A., and R. Stulz, 1996, Why do markets move together? An investigation of U.S-Japan stock return comovements, Journal of Finance 51, 951-986. Lee, K-H., 2006, The world price of liquidity risk, Working paper, Rutgers University. Lesmond, D., J. Ogden, and C. Trzcinka, 1999, A new estimate of transactions costs. Review of Financial Studies 12, 1113-1141. Li, L., 2002, Macroeconomic factors and the correlation of stock and bond returns. Working paper, Yale University. Long, J., 1974, Stock prices, inflation and the term structure of interest rates, Journal of Financial Economics 1, 131-170. Longin, F., and B. Solnik, 1995, Is the correlation in international equity returns constant: 1960-1990?, Journal of International Money and Finance, 14, 1, 3-26. Longin, F. and B. Solnik, 2001, Extreme correlation of international equity markets, Journal of Finance 56, 651-678. Longstaff, F., 2004, The flight-to-liquidity premium in U.S. Treasury bond prices, Journal of Business 77, 511-526. Merton, R., 1973, An intertemporal capital asset pricing model. Econometrica 41, 867-887. O’Hara, M., and G. Oldfield, 1986, The microeconomics of market making, Journal of Financial and Quantitative Analysis 21, 361-376. Pastor, L., and R. Stambaugh, 2003, Liquidity risk and expected stock returns, Journal of Political Economy 111, 642-685. Patelis, A., 1997. Stock return predictability and the role of monetary policy, Journal of Finance 52, 1951-1972. Sarkissian, S., and M. Schill, 2004, The overseas listing decision: New evidence of proximity preference, Review of Financial Studies 17, 769-809. Scruggs, J., 1998, Resolving the puzzling intertemporal relation between the market risk premium and conditional market variance: A two-factor approach, Journal of Finance 53, 575-603. Scruggs, J., and P. Glabadanidis, 2003, Risk premia and the dynamic covariance between stock and bond returns, Journal of Financial and Quantitative Analysis 38, 295-316. Shiller, R., and A. Beltratti, 1992, Stock-prices and bond yields – can their comovements be explained in terms of present value models, Journal of Monetary Economics 30, 25-46. Stone, B., 1974. Systematic interest-rate risk in a two-index model of returns, Journal of Financial and Quantitative Analysis 9, 709-721. Sweeny, R. and Warga, A., 1986, The pricing of interest rate risk: Evidence from the stock Market, Journal of Finance 41, 393-410. Thorbecke, W., 1997, On stock market returns and monetary policy, Journal of Finance 52, 635-654.