DOCSLIB.ORG

Security Analysis & Portfolio Management

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Security Analysis & Portfolio Management Security Analysis & Portfolio Management Lesson 1-10 International Centre for Distance Education and Open Learning Himachal Pradesh University Gyan Path, Summer H ill, Shimla - 171005 1 CONTENTS SR. NO. TOPIC PAGE NO. Contents 1 Syllabus 2 CHAPTER - 1 ELEMENTS OF INVESTMENT 3 CHAPTER - 2 PORTFOLIO ANALYSIS 16 CHAPTER- 3 PORTFOLIO CHOICE 27 CHAPTER - 4 PORTFOLIO PERFORMANCE EVALUATION 37 CHAPTER - 5 FUNDAMENTAL ANALYSIS AND VALUATION 47 CHAPTER - 6 TECHNICAL ANALYSIS 61 CHAPTER - 7 MARKET EFFICIENCY 83 CHAPTER - 8 MARKET MODEL 94 CHAPTER - 9 CAPITAL MARKET THEORY 101 CHAPTER - 10 ARBITRAGE PRICING THEORY 113 “ASSIGNMENTS" 128 2 MC 4.2 SECURITY ANALYSIS& PORTFOLIO MANAGEMENT Max Marks: 80 Internal Assessment: 20 Note: There will be nine (9) questions in all. The first question is compulsory and consists often (10) short-questions having two (2) marks-each. The candidate will be required to attempt one question from each unit and each question carries' fifteen (15) marks. COURSE CONTENTS UNIT-I PORTFOLIO ANALYSIS: Estimating rate of return and standard deviation of portfolio. Effect of combining the securities, Markowitz Risk-return optimization. PORTFOLIO PERFORMANCE EVALUATION: Measure of return risk adjusted measures of return, market timing, evaluation criteria and procedures. Investment policies of individuals, Tax saving schemes in India. UNIT-II Fundamental Analysis, Technical Analysis and Efficient Market Hypothesis. UNIT-III SINGLE INDEX MODEL OR MARKET MODEL: Portfolio total risk/ portfolio market risk and unique risk, Simple Sharpe's optimisation solution. UNIT-IV CAPITAL-MARKET THEORY: Capital market line, security market line, risk free lending and borrowings. FACTOR MODELS: Arbitrage pricing theory, two factor and multi-factor models, Principle of arbitrage, arbitrage portfolios. SUGGESTED READINGS: Fischer, D.E. and Jordan R.J., Security Analysis and Portfolio Management, Prentice Hall, 1983. Reilly, F.K., Investment Analysis & Portfolio Management, Drygen Press, 1985. 3 CHAPTER - 1 ELEMENTS OF INVESTMENT Structure:- 1.0 Learning Objectives 1.1 Introduction 1.2 Types of Assets 1.3 Return and Risk 1.4 Investment Vs. Speculation 1.5 Jobs in Investment Analysis and Portfolio Management 1.6 Types of Information 1.7 Need for Information 1.8 Self Check Exercise 1.9 Summary 1.10 Glossary 1.11 Answers to Self Check Exercise 1.12 Terminal Questions 1.13 Suggested Readings 1.0 LEARNING OBJECTIVES After reading the chapter,you will be able to:- Describe the types of assets available for investment Understand the concept of risk assessment with investment Describe the sources of investment information 1.1 INTRODUCTION Investment is the commitment of funds for a period of time with the expectation of receiving more than the current outlay. The returns could be in the form of annual income and/or appreciation in price. Many readers would already have studied investment analysis from the perspective of the firm. In this chapter, we will examine financial decisions from the perspective of persons investing in corporate securities and other assets. These could be individuals, societies and trusts, mutual funds etc. Why invest? While the reasons for investing are unique to each individual, common reasons could be to have money for emergencies, to beat inflation, buy a car or house, pay for education, indulge in travel and hobbies, to give to children or charity and for retirement. It is important for each investor to have a financial plan in order to achieve these goals. Various types of assets are available for investment such as land, buildings, fixed deposits, shares, bonds, gold etc. As investors, we need to understand the implications of investing in various assets, and the associated risks and returns. Most investors hold a combination of assets, known as a portfolio. Since, a portfolio may have different risk and return characteristics as compared to the simple 4 aggregation of its component assets, we also need to analyse the risk/return characteristics of portfolios and select portfolios suited to individual risk and return preferences. As individual needs and the risk and return of the portfolio change over time, the selected portfolio needs to be reviewed periodically and revised if necessary. 1.2 TYPES OF ASSETS Assets can be broadly classified into tangible assets, financial assets and intangible assets. Tangible assets consist of real/physical assets such as buildings, land, precious metals, commodities and luxury or collector's items. Financial assets/paper assets represent a claim on physical assets or future cash flows. They include savings deposits, fixed deposits, cash back insurance policies, shares, bonds and derivative instruments. Intangible assets include patents, trademarks, goodwill etc. Some assets such as collector's items may have more sentimental value than financial value. In this chapter, we will be concentrating on financial assets, although majority of the concepts and techniques can also be applied to real assets. Financial assets can be further divided into debt and equity, based on the timing and nature of expected cash flows. Debt is a fixed period loan, which comprises of periodic or cumulative interest payments and return of the principal on maturity. Equity, on the other hand, represents ownership of a company, where returns are received in the form of dividends and capital appreciation. Over the years, a variety of financial instruments have evolved in response to the needs of borrowers and investors. Financial assets can be held in the form of personal contracts or in the form of securities. In personal contracts, the amount of money invested, rate of interest and period of deposit etc. are based on mutually agreeable terms between the borrower and the lender. For example, the bank announces interest rates applicable for various periods and amounts invested, while the investor decides the amount of money and time period for his deposit. The principal is paid back on maturity or on premature withdrawal with a penalty. Such deposits normally cannot be sold or transferred to a third party. Securities on the other hand, are issued in fixed denominations and are fungible (each unit is indistinguishable from the other) and tradable. Examples of securities include shares and bonds. The choice of investment depends on many things including the investment period, the amount of money available for investment, need for liquidity, current income versus capital appreciation, tax considerations and ability to take risk. The features of some commonly held assets are briefly described below: Tangible Assets Real Estate can be viewed as an investment that provides regular income in the form of rental and appreciation in value. In India, there is scarcity of land and the value of property normally appreciates in the long run. The rate of appreciation and rental depend on whether the property is commercial or residential, the city/town and exact location. Since all individuals require housing services, one way to hedge against fluctuations in rentals is to purchase a house. Tax benefits are available on payments for housing loans; self-occupied houses are also given concessions in property tax. However, real estate requires a large investment and may need to be financed. The disadvantages are that it cannot be liquidated in parts, it also takes time and effort to sell because each property is unique. At the time of purchase, the buyer must ensure that the title deed is genuine, and provide for transaction costs such as stamp duty and brokerage. After purchase, arrangements need to be made for its physical safety to prevent encroachment, fire, theft of contents etc. Although property forms a major part of the investment portfolio for many individuals, there is no historical data on property returns in India due to the lack of transparency. Real Estate Investment Trust (REITs) and Real Estate Mutual Funds recently introduced in India should help overcome many of these disadvantages. Gold is a very liquid asset that has been traditionally held by central banks all over the world. Gold jewellery is also a common investment in most Indian households. The disadvantage of 5 investment in gold is that it requires expenditure for safe storage and its purity can only be guaranteed if purchased and stored in the form of certified bars. Investors can invest in gold exchange traded funds to overcome these disadvantages. Art: Appreciation is value depends on the painter and future demand and supply for the paintings. The market is unorganized and there is the problem of fakes, for which proper documentation and authentication is necessary. Financial Assets - Personal Contracts Savings bank accounts offer a safe deposit facility for cash and a nominal interest rate, with facilities for instant withdrawal and transfer. Fixed deposits in banks offer a higher rate of interest. However, the funds are locked in for a fixed period of time and there is a penalty for premature withdrawals. There are also some flexible plans, which combine the features of savings and fixed deposit accounts. Tax saving instruments u/s 80C Public provident fund: Contributions to the fund qualify for deduction from income up to the permissible limit and interest and withdrawals are tax free. The disadvantage isthe lock in period of 15 years, with limits on loans and withdrawals before maturity. Pension plans: These are annuity schemes where contributions qualify for deduction in the years when payments are made but the interest and principal are taxable at the time of withdrawal (pension payments). Insurance: Some life insurance plans build in an investment component, which offer periodic and/ or terminal cash benefits. The returns can be compared with other investments if the payment for pure insurance is deducted from the annual premium before calculating returns. In all such schemes, the individual investor should consider the alternative investment avenues and decide whether it is better to pay tax and invest elsewhere or invest in these schemes. The liquidity, and returns and risks of alternative investment avenues need to be considered.
Load more

Recommended publications
  • 11.50 Margin Constraints and the Security Market Line
    Margin Constraints and the Security Market Line Petri Jylh¨a∗ June 9, 2016 Abstract Between the years 1934 and 1974, the Federal Reserve frequently changed the initial margin requirement for the U.S. stock market. I use this variation in margin requirements to test whether leverage constraints affect the security market line, i.e. the relation between betas and expected returns. Consistent with the theoretical predictions of Frazzini and Ped- ersen (2014), but somewhat contrary to their empirical findings, I find that tighter leverage constraints result in a flatter security market line. My results provide strong empirical sup- port for the idea that funding constraints faced by investors may, at least partially, help explain the empirical failure of the capital asset pricing model. JEL Classification: G12, G14, N22. Keywords: Leverage constraints, Security market line, Margin regulations. ∗Imperial College Business School. Imperial College London, South Kensington Campus, SW7 2AZ, London, UK; [email protected]. I thank St´ephaneChr´etien,Darrell Duffie, Samuli Kn¨upfer,Ralph Koijen, Lubos Pastor, Lasse Pedersen, Joshua Pollet, Oleg Rytchkov, Mungo Wilson, and the participants at American Economic Association 2015, Financial Intermediation Research Society 2014, Aalto University, Copenhagen Business School, Imperial College London, Luxembourg School of Finance, and Manchester Business School for helpful comments. 1 Introduction Ever since the introduction of the capital asset pricing model (CAPM) by Sharpe (1964), Lintner (1965), and Mossin (1966), finance researchers have been studying why the return difference between high and low beta stocks is smaller than predicted by the CAPM (Black, Jensen, and Scholes, 1972). One of the first explanation for this empirical flatness of the security market line is given by Black (1972) who shows that investors' inability to borrow at the risk-free rate results in a lower cross-sectional price of risk than in the CAPM.
    [Show full text]
  • Frictional Finance “Fricofinance”
    Frictional Finance “Fricofinance” Lasse H. Pedersen NYU, CEPR, and NBER Copyright 2010 © Lasse H. Pedersen Frictional Finance: Motivation In physics, frictions are not important to certain phenomena: ……but frictions are central to other phenomena: Economists used to think financial markets are like However, as in aerodynamics, the frictions are central dropping balls to the dynamics of the financial markets: Walrasian auctioneer Frictional Finance - Lasse H. Pedersen 2 Frictional Finance: Implications ¾ Financial frictions affect – Asset prices – Macroeconomy (business cycles and allocation across sectors) – Monetary policy ¾ Parsimonious model provides unified explanation of a wide variety of phenomena ¾ Empirical evidence is very strong – Stronger than almost any other influence on the markets, including systematic risk Frictional Finance - Lasse H. Pedersen 3 Frictional Finance: Definitions ¾ Market liquidity risk: – Market liquidity = ability to trade at low cost (conversely, market illiquidity = trading cost) • Measured as bid-ask spread or as market impact – Market liquidity risk = risk that trading costs will rise • We will see there are 3 relevant liquidity betas ¾ Funding liquidity risk: – Funding liquidity for a security = ability to borrow against that security • Measured as the security’s margin requirement or haircut – Funding liquidity for an investor = investor’s availability of capital relative to his need • “Measured” as Lagrange multiplier of margin constraint – Funding liquidity risk = risk of hitting margin constraint
    [Show full text]
  • Effects of Estimating Systematic Risk in Equity Stocks in the Nairobi Securities Exchange (NSE) (An Empirical Review of Systematic Risks Estimation)
    International Journal of Academic Research in Accounting, Finance and Management Sciences Vol. 4, No.4, October 2014, pp. 228–248 E-ISSN: 2225-8329, P-ISSN: 2308-0337 © 2014 HRMARS www.hrmars.com Effects of Estimating Systematic Risk in Equity Stocks in the Nairobi Securities Exchange (NSE) (An Empirical Review of Systematic Risks Estimation) Paul Munene MUIRURI Department of Commerce and Economic Studies Jomo Kenyatta University of Agriculture and Technology Nairobi, Kenya, E-mail: [email protected] Abstract Capital Markets have become an integral part of the Kenyan economy. The manner in which securities are priced in the capital market has attracted the attention of many researchers for long. This study sought to investigate the effects of estimating of Systematic risk in equity stocks of the various sectors of the Nairobi Securities Exchange (NSE. The study will be of benefit to both policy makers and investors to identify the specific factors affecting stock prices. To the investors it will provide useful and adequate information an understanding on the relationship between risk and return as a key piece in building ones investment philosophy. To the market regulators to establish the NSE performance against investors’ perception of risks and returns and hence develop ways of building investors’ confidence, the policy makers to review and strengthening of the legal and regulatory framework. The paper examines the merged 12 sector equity securities of the companies listed at the market into 4sector namely Agricultural; Commercial and Services; Finance and Investment and Manufacturing and Allied sectors. This study Capital Asset Pricing Model (CAPM) of Sharpe (1964) to vis-à-vis the market returns.
    [Show full text]
  • The Capital Asset Pricing Model (Capm)
    THE CAPITAL ASSET PRICING MODEL (CAPM) Investment and Valuation of Firms Juan Jose Garcia Machado WS 2012/2013 November 12, 2012 Fanck Leonard Basiliki Loli Blaž Kralj Vasileios Vlachos Contents 1. CAPM............................................................................................................................................... 3 2. Risk and return trade off ............................................................................................................... 4 Risk ................................................................................................................................................... 4 Correlation....................................................................................................................................... 5 Assumptions Underlying the CAPM ............................................................................................. 5 3. Market portfolio .............................................................................................................................. 5 Portfolio Choice in the CAPM World ........................................................................................... 7 4. CAPITAL MARKET LINE ........................................................................................................... 7 Sharpe ratio & Alpha ................................................................................................................... 10 5. SECURITY MARKET LINE ...................................................................................................
    [Show full text]
  • How Did Too Big to Fail Become Such a Problem for Broker-Dealers?
    How did Too Big to Fail become such a problem for broker-dealers? Speculation by Andy Atkeson March 2014 Proximate Cause • By 2008, Broker Dealers had big balance sheets • Historical experience with rapid contraction of broker dealer balance sheets and bank runs raised unpleasant memories for central bankers • No satisfactory legal or administrative procedure for “resolving” failed broker dealers • So the Fed wrestled with the question of whether broker dealers were too big to fail Why do Central Bankers care? • Historically, deposit taking “Banks” held three main assets • Non-financial commercial paper • Government securities • Demandable collateralized loans to broker-dealers • Much like money market mutual funds (MMMF’s) today • Many historical (pre-Fed) banking crises (runs) associated with sharp changes in the volume and interest rates on loans to broker dealers • Similar to what happened with MMMF’s after Lehman? • Much discussion of directions for central bank policy and regulation • New York Clearing House 1873 • National Monetary Commission 1910 • Pecora Hearings 1933 • Friedman and Schwartz 1963 Questions I want to consider • How would you fit Broker Dealers into the growth model? • What economic function do they perform in facilitating trade of securities and financing margin and short positions in securities? • What would such a theory say about the size of broker dealer value added and balance sheets? • What would be lost (socially) if we dramatically reduced broker dealer balance sheets by regulation? • Are broker-dealer liabilities
    [Show full text]
  • Return, Risk and the Security Market Line Systematic and Unsystematic
    Expected and Unexpected Returns • The return on any stock traded in a Return, Risk and the Security financial market is composed of two parts. c The normal, or expected, part of the return is Market Line the return that investors predict or expect. d The uncertain, or risky, part of the return Chapter 18 comes from unexpected information revealed during the year. • Total return – Expected return = Unexpected return R – E(R) = U Systematic and Unsystematic Diversification and Risk Risk Systematic risk • In a large portfolio, some stocks will go up in value because of positive company-specific Risk that influences a large number of events, while others will go down in value assets. Also called market risk. because of negative company-specific events. Unsystematic risk • Unsystematic risk is essentially eliminated by Risk that influences a single company or diversification, so a portfolio with many assets a small group of companies. Also called has almost no unsystematic risk. unique or asset-specific risk. • Unsystematic risk is also called diversifiable risk, while systematic risk is also called nondiversifiable risk. Total risk = Systematic risk + Unsystematic risk The Systematic Risk Principle Measuring Systematic Risk • The systematic risk principle states that Beta coefficient (β) the reward for bearing risk depends only Measure of the relative systematic risk of an on the systematic risk of an investment. asset. Assets with betas larger than 1.0 • So, no matter how much total risk an asset have more systematic risk than average, has, only the systematic portion is relevant and vice versa. in determining the expected return (and • Because assets with larger betas have the risk premium) on that asset.
    [Show full text]
  • Five-Minute-Mba-In-Corporate-Finance
    GetPedia : Get How Stuff Works! Works! Welcome To GetPedia.com The Online Information Resource Providing You the Most Unique Content and Genuine Articles in the most Widest range categories. Browse and discover Information in each and every category. There are currently more than 500,000 articles to browse for. Business Communications Health & Fitness Advertising Broadband Internet Acne Branding Mobile & Cell Phone Aerobics & Cardio Business Management VOIP Alternative Medicine Business Ethics Video Conferencing Beauty Tips Careers, Jobs & Employment Satellite TV Depression Customer Service Diabetes Reference & Education Marketing Exercise & Fitness Networking Book Reviews Fitness Equipment Network Marketing College & University Hair Loss Pay-Per-Click Advertising Psychology Medicine Presentation Science Articles Meditation Public Relations Food & Drinks Muscle Building & Sales Bodybuilding Sales Management Coffee Nutrition Sales Telemarketing Cooking Tips Nutritional Supplements Sales Training Recipes & Food and Drink Weight Loss Small Business Wine & Spirits Yoga Strategic Planning Home & Family Entrepreneur Recreation and Sport Negotiation Tips Crafts & Hobbies Fishing Team Building Elder Care Golf Top Quick Tips Holiday Martial Arts Home Improvement Internet & Businesses Online Motorcycle Home Security Affiliate Revenue Interior Design & Decorating Self Improvement & Motivation Blogging, RSS & Feeds Landscaping & Gardening Attraction Domain Name Babies & Toddler Coaching E-Book Pets Creativity E-commerce Parenting Dealing with Grief
    [Show full text]
  • Empirical Study on CAPM Model on China Stock Market
    Empirical study on CAPM model on China stock market MASTER THESIS WITHIN: Business administration in finance NUMBER OF CREDITS: 15 ECTS TUTOR: Andreas Stephan PROGRAMME OF STUDY: international financial analysis AUTHOR: Taoyuan Zhou, Huarong Liu JÖNKÖPING 05/2018 Master Thesis in Business Administration Title: Empirical study on CAPM model of China stock market Authors: Taoyuan Zhou and Huarong Liu Tutor: Andreas Stephan Date: 05/2018 Key terms: CAPM model, β coefficient, empirical test Abstract Background: The capital asset pricing model (CAPM) describes the interrelationship between the expected return of risk assets and risk in the equilibrium of investment market and gives the equilibrium price of risky assets (Banz, 1981). CAPM plays a very important role in the process of establishing a portfolio (Bodie, 2009). As Chinese stock market continues to grow and expand, the scope and degree of attention of CAPM models in China will also increase day by day. Therefore, in China, such an emerging market, it is greatly necessary to test the applicability and validity of the CAPM model in the capital market. Purpose: Through the monthly data of 100 stocks from January 1, 2007 to February 1, 2018, the time series and cross-sectional data of the capital asset pricing model on Chinese stock market are tested. The main objectives are: (1) Empirical study of the relationship between risk and return using the data of Chinese stock market in recent years to test whether the CAPM model established in the developed western market is suitable for the Chinese market. (2) Through the empirical analysis of the results to analyse the characteristics and existing problems of Chinese capital market.
    [Show full text]
  • Money Illusion in the Stock Market: the Modigliani-Cohn Hypothesis*
    MONEY ILLUSION IN THE STOCK MARKET: THE MODIGLIANI-COHN HYPOTHESIS* RANDOLPH B. COHEN CHRISTOPHER POLK TUOMO VUOLTEENAHO Modigliani and Cohn hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion. I. INTRODUCTION Do people suffer from money illusion, confusing nominal dollar values with real purchasing power? When the difference between real and nominal quantities is small and stakes are relatively low, equating the nominal dollar amounts with real values provides a convenient and effective rule of thumb. There- fore, it seems plausible that people often ignore the rate of infla- tion in processing information for relatively small decisions.1 Modigliani and Cohn [1979] hypothesize that stock market investors may also suffer from a particular form of money illu- sion, incorrectly discounting real cash flows with nominal dis- count rates. An implication of such an error is that time variation in the level of inflation causes the market’s subjective expectation of the future equity premium to deviate systematically from the * An earlier draft of the paper was circulated under the title “How Inflation Illusion Killed the CAPM.” We would like to thank Clifford Asness, John Camp- bell, Edward Glaeser, Jussi Keppo, Stefan Nagel, Andrei Shleifer, Jeremy Stein, and three anonymous referees for helpful comments.
    [Show full text]
  • The Capital Asset Pricing Model
    Institutionen för Ekonomi, Statistik och Informatik The Capital Asset Pricing Model Test of the model on the Warsaw Stock Exchange C –Thesis Author: Bartosz Czekierda Writing tutor: Håkan Persson The Capital Asset Pricing Model: Test of the model on the Warsaw Stock Exchange Lucy: “I’ve just come up with the perfect theory. It’s my theory that Beethoven would have written even better music if he had been married” Schroeder: “What’s so perfect about that theory?” Lucy: “It can’t be proven one way or the other” - Charles Schulz, Peanuts, 1976 2 The Capital Asset Pricing Model: Test of the model on the Warsaw Stock Exchange Abstract Since 1994 when the Warsaw Stock Exchange has been acknowledged as a full member of World Federation of Exchanges and became one of the fastest developing security markets in the region, it has been hard to find any studies relating to the assets price performance on this exchange. That is why I decided to write this paper in which the Nobel price winning theory namely the Capital Asset Pricing Model has been tested. The Capital Asset Pricing Model (or CAPM) is an equilibrium model which relates asset’s risk measured by beta to its returns. It states that in a competitive market the expected rate of return on an asset varies in direct proportion to its beta. In this paper the performance of 100 stocks traded continuously on the main market in the years 2002-2006 has been tested. I have performed three independent tests of the CAPM based on different methods and techniques to better check the validity of the theory and then compared the results.
    [Show full text]
  • The Economics of Financial Markets
    The Economics of Financial Markets Roy E. Bailey Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge ,UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridg e.org /9780521848275 © R. E. Bailey 2005 This book is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2005 - ---- eBook (EBL) - --- eBook (EBL) - ---- hardback - --- hardback - ---- paperback - --- paperback Cambridge University Press has no responsibility for the persistence or accuracy of s for external or third-party internet websites referred to in this book, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. The Theory of Economics does not furnish a body of settled conclusions imme- diately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions. It is not difficult in the sense in which mathematical and scientific techniques are difficult; but the fact that its modes of expression are much less precise than these, renders decidedly difficult the task of conveying it correctly to the minds of learners. J. M. Keynes When you set out for distant Ithaca,
    [Show full text]
  • International Illiquidity Malkhozov, Aytek, Philippe Mueller, Andrea Vedolin, and Gyuri Venter
    K.7 International Illiquidity Malkhozov, Aytek, Philippe Mueller, Andrea Vedolin, and Gyuri Venter Please cite paper as: Malkhozov, Aytek, Philippe Mueller, Andrea Vedolin, and Gyuri Venter (2017). International Illiquidity. International Finance Discussion Papers 1201. https://doi.org/10.17016/IFDP.2017.1201 International Finance Discussion Papers Board of Governors of the Federal Reserve System Number 1201 March 2017 Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 1201 March 2017 International Illiquidity Aytek Malkhozov Philippe Mueller Andrea Vedolin Gyuri Venter NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References to International Finance Discussion Papers (other than an acknowledgment that the writer has had access to unpublished material) should be cleared with the author or authors. Recent IFDPs are available on the Web at www.federalreserve.gov/pubs/ifdp/. This paper can be downloaded without charge from Social Science Research Network electronic library at www.ssrn.com. International Illiquidity Aytek Malkhozov Philippe Mueller Andrea Vedolin Federal Reserve Board LSE LSE Gyuri Venter∗ CBS Abstract We build a parsimonious international asset pricing model in which devia- tions of government bond yields from a fitted yield curve of a country measure the tightness of investors’ capital constraints. We compute these measures at daily frequency for six major markets and use them to test the model- predicted effect of funding conditions on asset prices internationally. Global illiquidity lowers the slope and increases the intercept of the international security market line. Local illiquidity helps explain the variation in alphas, Sharpe ratios, and the performance of betting-against-beta (BAB) strategies across countries.
    [Show full text]