The purpose of the current paper is to explore the cross-sectional relationship between market illiquidity and market excess return on stocks traded in the Shanghai Stock Exchange(SSE)over-time; using data from monthly and yearly databases of CSMAR(China Securities Market and Accounting Research) and statistics annual Shanghai Stock Exchange from 2001.1-2012.12. We believe that the empirical tests on the stocks traded in the New York Stock Exchange (NYSE) of the well-established paper by Amihud(2002)would be potentially useful to be tested in a different setting, the SSE; in doing so, we apply the same illiquidity measure and estimating models to examine the hypotheses of the current study. In consideration of the aim of the current study, an illiquidity measure proposed by a Chinese scholar Huang (2009)is also applied in the empirical tests. Due to that Chinese stock market is still young and under development, any outcomes from the current study that are dissimilar to the ones appeared in Amihud(2002) in the sense of the effectiveness of market illiquidity have nothing to do with the utility of illiquidity theory; rather, different market characteristics should be taken into account, such as the unpredictability of frequent policy interventions on a Chinese stock market, following Wang Fang, Han Dong and Jiang Xianglin (2002).

在探討台灣共同基金市場月報酬時，常可以觀察到其呈現序列相關的現象。本篇論文旨在研究序列相關的成因，進而追蹤平滑報酬現象和流動性。我們利用Lo and MacKinlay (2004)提出的計量模型，將可觀察到的基金月報酬對落後期的預期報酬做回歸估計。根據模型估計係數值，我們可以用來當作判定流動性和平滑報酬的指標。實證當中發現固定收益型和房地產投資信託基金的流動性偏低，而股票型和指數型基金的流動性偏高。不管在最小平方估計法和最大概似估計法之下，實證結果都呈現類似情況。 / In this study we can detect the serial correlation of monthly returns occurred in Taiwan’s mutual fund market associated with Illiquidity and smoothed returns. We utilize a simple econometric model in which observed returns are a finite moving-average of unobserved economic returns and we generate empirically realistic levels of serial correlation for historical mutual-fund returns. We attempt to estimate model coefficients as a proxy of illiquidity exposure and find out some illiquid fund categories (REITs and Fixed Income classifications) having lower smoothing indexes or estimated parameters. Although we utilize two different estimation methods (MLE and OLS) to obtain smoothing parameters we obtain the similar result under both of them, probably because of unbiased estimated coefficients.

Yes / This paper investigates time-varying characteristics of illiquidity and the pricing of its risk using a liquidity-adjusted capital asset pricing model (L-CAPM). Collecting data from a pool of Eurozone countries between 1990 and 2018, we employ Markov switching models to assess the degree of persistence of illiquidity shocks. Contrary to prior research, which largely makes use of autoregressive (AR) processes, we provide strong evidence that illiquidity is time-varying and the persistence of shocks determines two distinct regimes characterised by high and low illiquidity. We assess pricing of illiquidity risk by developing and empirically testing a conditional L-CAPM model, where different regimes constitute priced risk factors for the cross-section of stock returns. We extend previous unconditional versions of L-CAPM models and we show that the various channels through which illiquidity affects asset returns and price of risks are time-varying. We find strong support for our conditional L-CAPM and our results are robust to alternative specifications and estimation techniques. These findings have important implications for portfolio management practices and are relevant to portfolio and risk managers and regulatory institutions.

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Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2013. / Corporations often find it difficult to raise capital in illiquid markets such as most African markets and if they do they pay a premium which is not only costly to them but also propagates illiquidity in these markets. Convertible bonds provide a cheaper source of nancing for issuers with the optionality of maintaining targeted capital structures. However, these instruments are not popular in these markets as they are less understood compared to their conventional counterparts and if used are often mispriced. The main objective of this research is to provide a valua- tion framework for structured bonds, speci cally convertible bonds where market imperfections such as illiquidity are prevalent. This will entail customising the standard valuation framework so that these market imperfections are incorporated in the model. The valuation framework of the convertible bond is then applied to an illiquid market where several deviations from the perfect-market benchmarks exist and then observe what e ect these deviations have by comparing the theo- retical value to that of a convertible bond assuming the market is liquid.

The dissertation consists of two essays. The first essay investigates if market illiquidity is a significant determinant of capital structure decisions. We hypothesize that firms would likely compare the illiquidity of two sources of external funding at a given point in time and issue the one with lower illiquidity. Therefore, if the level of illiquidity is a key driver of firms’ capital structure decisions in that year, the higher the level of stocks illiquidity, the more of its financing needs are satisfied by the issuance of debt, and the higher the level of bonds illiquidity, the less of its financing needs are satisfied by the issuance of debt. We find that illiquidity of the two sources of external funding affects significantly the capital structure decisions of U.S. firms over the sample period 2003-2018. Specifically, the coefficient of relative bonds illiquidity is negative, large, and strongly significant regardless of leverage measurement, and the coefficient of relative stocks illiquidity is positive, large, and strongly significant regardless of leverage measurement. The second essay investigates if markets illiquidity is a significant determinant of investment decisions. We argue that an increase in investment opportunities due to an increase in bonds liquidity is for the decrease of the firm’s cost of capital and the decrease in its issuance cost. With a lower cost of capital and a higher ability to issue securities, firms are able to undertake more investment opportunities. We find that bonds and stocks illiquidity affect significantly the investment decisions of U.S. firms over the sample period 2003-2018. Specifically, the coefficients of bonds and stocks illiquidity are negative, large, and strongly significant regardless of investment measurement. Also, we find the effect of bonds illiquidity is more pronounced for financially constrained firms using different financial constraints measures.

The research is conducted through a quantitative study based on data collected from the Copenhagen Stock Exchange between 2003 and 2011. Our primary purpose was to ascertain whether illiquidity was priced in the Copenhagen Stock Exchange. Illiquidity has been shown as a difficult concept to measure as it is not an observable variable in itself. We show that illiquidity can be measured using Amihud’s (2002) ILLIQ-measure. We investigated the relationship between asset pricing models and illiquidity. We provided an in depth look into illiquidity and past research involving liquidity and asset pricing as well as a thorough theoretical background concerning relevant academic theory. Though our empirical analysis we found evidence which supports the pricing of illiquidity in the Copenhagen Stock Exchange.

With data covering 20 years, we test three different liquidity measures' explanatory power in explaining asset returns on the Swedish stock market, and if an illiquidity premium exists. After establishing whether an illiquidity premium exists or not, we test whether the asset pricing models CAPM and the Fama-French three-factor model can benefit from including a liquidity factor. We use t-tests and regressions to test the liquidity measures and whether our chosen asset pricing models benefit from including a liquidity factor. Our findings do not support the definition of an illiquidity premium for our liquidity measures Return to dollar volume, Turnover rate, and Zero trading days. We apply a common definition of the illiquidity premium, which is that the least liquid portfolio should outperform the most liquid portfolio. We do, however, find that liquidity can to some degree explain asset returns, and when constructing a liquidity factor and including it into our asset pricing models, their explanatory power increases. Therefore, liquidy still might be a variable one should consider when explaining asset returns. Both CAPM and Fama-French three-factor model becomes better when including liquidity, and the result is consistent in our robustness test where we divide our sample into subperiods.

A private company lacks a direct observable market value and several situations may require a practitioner to compute the value of a private company. Since most of the valuation methods in use are based on data derived from the public stock markets certain adjustments may be appropriate when valuing a private company. Marketability and liquidity is said to be one of the more observable differences between a public and a private company. This implies that the shares in a private company have a lack of marketability and liquidity in comparison to the shares in a public company, which practitioners may have to adjust for. Several quantitative studies are conducted on the subject in order reassure price differences between public and private companies, namely a private company discount (PCD). Furthermore, several quantitative studies strive to establish a general and standardized cost for lack of marketability (liquidity) expressed as the illiquidity discount or the discount for lack of marketability (DLOM). These studies have different perceptions and use different hypothesis to identify illiquidity, which in turn will lead to a large span of different discounts. Essentially, earlier research examines assets marketability and liquidity with the assumption of them being equal in all other aspects. Professional practitioners constantly seek guidance in these studies to justify their estimated and applied illiquidity discount/DLOM when performing a valuation on a privately held company. Furthermore, we have also observed survey-studies adopting a more qualitative method in order to appreciate the level of discounts applied in a valuation by professional practitioners. Consequently, this sea of studies provides the practitioner with a discount that ranges from 5% to 60% to take a stand on. The impossibility to determine the most adequate theory contributes to the inconsistency of how this issue is handled in reality by market participants and courts. In our study we first provide the reader with a rigorous literature study, which describes earlier research on the subject of illiquidity discount/DLOM. We conclude that research has gone one step too far when conducting all of these quantitative studies. This is why we conduct our own empirical data through semi-structured in-depth interviews with professional valuation experts on the Swedish market. This makes our approach a retake on the issue in order to generate suggestions to further studies. What we find is that all of the independent consultants, primarily, does not apply a discount when valuing a majority interest due to the paradigm on the Swedish market. In contrast, the private equity fund manager, which only acquires majority interest, can use this type of discounts in their dependent valuation of majority interests. However, when valuing a minority interest the independent valuation consultants use quantitative empirical studies to derive a starting point of the discount. The level of the discount is then estimated upon the purpose of the valuation and firm-specific variables, which all of the participant’s states to be the most important ones when estimating a illiquidity discount/DLOM. Based on these results we argue that one should be very careful when taking guidelines from quantitative empirical studies. Our interpretation is that the level of illiquidity/DLOM applicable depends on the level of attractiveness, which in turn has a bearing on all firm-specific variables. When it comes to applying the appropriate discount all of the participants argue in favor for a discount-on-value and not as some research suggest; a risk premium added to the discount rate. We also generate adequate suggestions to further studies based on these interviews. Since courts and in particular the Swedish tax-court is inconsistent when approving or rejecting illiquidity discounts/DLOM we suggest legal actions on the issue. Furthermore we suggest a survey-like study in order to catch consensus take on how to estimate the level of discount. In fact, this can be done every year in a similar way as PwC’s market risk premium study is conducted.

This dissertation consists of two essays: the first investigates informed trading in the Chinese stock exchanges, and the second examines the persistency of correlation of currency future prices. For the first essay, using a sample of Chinese firms dual-listed in both the China mainland stock exchange and the Hong Kong stock exchange, I investigate the two types of informed trading - insider trading and trading derived from better analysis in the A-and H-share markets. The results suggest that H-shares have relatively more informed trading based on better analysis. In addition, the results from the firm size regression can also be seen as indirect evidence that larger firms tend to have trading with better analysis and less insider trading. These patterns are also confirmed in the sub-period analysis. However, I find no significant relation between informed trading and the relative pricing of A- and H-shares. For the second essay I examine the dynamic correlation between currency futures prices, focusing on the persistency of correlation of currency prices. Using the Dynamic Conditional Correlation model developed by Engle (2002), this study incorporates time-varying correlations into the analysis. The sample includes eight currency futures traded on the Chicago Mercantile Exchange from 1999 to 2008 and the U.S. dollar index future. The study finds that the Canadian dollar has the greater persistency while the Brazilian real has the weakest. No less important, the study finds that the time-varying conditional correlation between currency futures and the U.S. dollar futures is influenced by two types of liquidity: price impacts (Amihud illiquidity) and the logarithm of trading volume.