Browsing by Subject "Liquidity"
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Item Essays on empirical asset pricing(2011-08) Wei, Chishen; Titman, Sheridan; Griffin, John; Han, Bing; Huang, Jennifer; Jennings, Ross; Sialm, ClemensThis dissertation contains two essays that use empirical techniques to shed light on open questions in the asset pricing literature. In the first essay, I investigate whether foreign institutional investors affect stock liquidity in domestic equity markets. The evidence indicates that stocks with higher foreign institutional ownership subsequently experience higher liquidity. However, it is difficult to interpret the causal relation of this finding because institutional investors self-select into more liquid stocks. To solve this problem, I exploit a provision in the 2003 US dividend tax cut which extends tax-relief to dividends from US tax-treaty countries but not to dividends from non-treaty countries. This natural experiment suggests a causal link between foreign institutional investors and liquidity. Consistent with the predictions of theoretical models, I find that liquidity improves due to foreign institutional investors increasing information competition. In the second essay, I introduce a new measure of difference of opinion using mutual fund portfolio weights to test prominent competing theories of the effect of heterogeneous beliefs on asset prices. The over-valuation theory (Miller (1977)) proposes that in the presence of short-sale constraints stock prices reflects only the view of optimistic investors which implies lower subsequent returns. Alternatively, neo-classical asset pricing models (Williams (1977), Merton (1987)) suggest that differences of opinions indicate high levels of information uncertainty or risk which implies higher expected returns. My initial result finds no support for the over-valuation theory. Instead, the measure used in this study finds that high differences of opinion stocks weakly outperform low differences of opinion stocks by 2.42% annually which is more consistent with the information uncertainty explanation.Item On mutual fund herding(2011-08) Koch, Andrew Wallace; Starks, Laura T.; Almazan, Andres; Alti, Aydogan; Cohn, Jonathan; Ruenzi, Stefan; Sialm, ClemensThis study examines several issues related to mutual fund herd behavior. First, a unifying and consistent framework for measuring herd behavior is developed. This framework generates portfolio-level measures for each fund manager over each quarter, and relates herd behavior to other aspects of portfolio dynamics. Simulations indicate significant and persistent non-random herd behavior. Second, mechanisms that potentially underly herd behavior are tested. Empirical results indicate that herding funds tend to i) change their holdings towards levels similar to peers, ii) have less experienced managers, and iii) underperform their peers. These results are consistent with a career concerns theory of herding. Third, the impact of mutual fund herding on stock liquidity is examined. Empirical results indicate that herd behavior can lead to correlation in stock-level liquidity.Item Predictability in order flow(2012-08) Hirschey, Nicholas Hauschel; Titman, Sheridan; Griffin, John M. (John Meredith), 1970-High-frequency traders (HFTs) accounted for roughly forty percent of trading volume on the NASDAQ Stock Market in 2009, but there is little evidence on the type of information these investors trade on. This study tests the hypothesis that HFTs anticipate and trade ahead of other investors' order flow. I find that HFTs' aggressive purchases predict future aggressive buying by non-HFTs, and their aggressive sales predict future aggressive selling by non-HFTs. The positive correlation between trading by HFTs and future trading by other investors is robust to the exclusion of trading around news releases, indicating the effect is not driven by HFTs reacting to news announcements faster than other investors. The effects are stronger in the morning and on high volume days. There are also persistent differences among HFTs in the tendency of their trades to predict future order flow. These findings have implications for the speed at which prices adjust to new information, incentives to acquire information, and the price impact of traditional asset managers' trades.Item The role of liquidity in financial markets(1996-05) Wadhwa, Pavan, 1966-; Ronn, Ehud I.In the finance context, the term "liquidity" is usually associated either with "liquidity preference" or the "ease with which an asset can be bought or sold at minimum cost." This dissertation seeks to address three issues pertaining to these areas. First, we argue that the reason why investors have a liquidity preference in the fixed-income market is not to preserve liquidity but to minimize interest rate risk. Investors will not invest in long-maturity fixed-income securities unless they are compensated for the risk they take by investing in such securities. This leads to positive expected excess returns on long-maturity securities vis-a-vis short-maturity ones. Second, we examine long-maturity fixed-income securities to determine whether there exists a term premium which is monotonically increasing in the term to maturity of the security. Third, we consider liquidity in the context of the "bid-ask spread" and argue that the liquidity of a firm's equity securities will be a direct function of the financial condition of the firm, that is firms in poorer financial condition will have lower security liquidity. Our findings suggest that 1) there is indeed a positive relationship between risk and expected return in the fixed-income market, 2) there does exist a term premium in the fixed-income market which increases approximately monotonically with the term to maturity of the fixed-income instrument, and 3) the liquidity of a firm's equity is indeed a function of its financial condition.Item The Volatility of Liquidity and Expected Stock Returns(2011-07-29) Akbas, Ferhat 1981-The pricing of total liquidity risk is studied in the cross-section of stock returns. The study suggests that there is a positive relation between total volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002) and its volatility is measured using daily data. Furthermore, we document that total volatility of liquidity is priced in the presence of systematic liquidity risk: the covariance of stock returns with aggregate liquidity, the covariance of stock liquidity with aggregate liquidity, and the covariance of stock liquidity with the market return. The separate pricing of total volatility of liquidity indicates that idiosyncratic liquidity risk is important in the cross section of returns. This result is puzzling in light of Acharya and Pedersen (2005) who develop a model in which only systematic liquidity risk affects returns. The positive correlation between the volatility of liquidity and expected returns suggests that risk averse investors require a risk premium for holding stocks that have high variation in liquidity. Higher variation in liquidity implies that a stock may become illiquid with higher probability at a time when it is traded. This is important for investors who face an immediate liquidity need and are not able to wait for periods of high liquidity to sell.