ruslan goyenko
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Ruslan Goyenko
Treasury Illiquidity and Funding Liquidity Risk
Treasury Illiquidity and Funding Liquidity Risk
PRMIA-CIRANO- Lunch Conference December 7, 2011
Ruslan GoyenkoMcGill University
ILLIQUIDITY
MARKET ILLIQUIDITY FUNDING LIQUIDITY
We know how to measure How do we measure it?
It is priced Is it priced?
What the paper does:
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Treasury Illiquidity and Funding Liquidity
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Funding Problems
Reduced positions
Higher margins
Price moves away from
fundamentals
Losses on existing
positions
Outflow from the stock market
Treasury Illiquidity
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Market Liquidity – reflects the ease of trading in bond markets (Goyenko, Subrahmanyam and Ukhov, JFQA, 2011)
Also predicts the ease of trading in the stock market (Goyenko and Ukhov, JFQA, 2009)
What else?
Treasury Illiquidity
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
TED SPREAD
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Treasury Illiquidity and Funding Liquidity
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
1999/1 2000/1 2001/1 2002/1 2003/1 2004/1 2005/1 2006/1 2007/1 2008/1 2009/10
0.001
0.002
0.003
0.004
0.005
0.006
0.007
0.008
Treasury ILLIQ
1999/1 2000/1 2001/1 2002/1 2003/1 2004/1 2005/1 2006/1 2007/1 2008/1 2009/10
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035
0.004
0.0045
TED
For the sample period 01/1971 to 12/2009, correlation=0.78
VAR(2): FED, Stock Illiquidity, Bond Illiquidity and TED spread
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
-.0001
.0000
.0001
.0002
.0003
.0004
1 2 3 4 5 6 7 8 9 10
Response of TED SPREAD to FED
-.0001
.0000
.0001
.0002
.0003
.0004
1 2 3 4 5 6 7 8 9 10
Response of TED SPREAD to Stock ILLIQ
-.0001
.0000
.0001
.0002
.0003
.0004
1 2 3 4 5 6 7 8 9 10
Response of TED SPREAD to Bond ILLIQ
-.0001
.0000
.0001
.0002
.0003
.0004
1 2 3 4 5 6 7 8 9 10
Response of TED SPREAD to TED SPREAD
Response to Cholesky One S.D. Innovations ± 2 S.E.
VAR(2): FED, Stock Illiquidity, Bond Illiquidity and TED spread
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
-0.5
0.0
0.5
1.0
1.5
2.0
1 2 3 4 5 6 7 8 9 10
Response of Stock ILLIQ to FED
-0.5
0.0
0.5
1.0
1.5
2.0
1 2 3 4 5 6 7 8 9 10
Response of Stock ILLIQ to Bond ILLIQ
-0.5
0.0
0.5
1.0
1.5
2.0
1 2 3 4 5 6 7 8 9 10
Response of Stock ILLIQ to TED SPREAD
-.002
-.001
.000
.001
.002
.003
.004
1 2 3 4 5 6 7 8 9 10
Response of Bond ILLIQ to FED
-.002
-.001
.000
.001
.002
.003
.004
1 2 3 4 5 6 7 8 9 10
Response of Bond ILLIQ to Stock ILLIQ
-.002
-.001
.000
.001
.002
.003
.004
1 2 3 4 5 6 7 8 9 10
Response of Bond ILLIQ to TED SPREAD
Response to Cholesky One S.D. Innovations ± 2 S.E.
Bond-ILLIQ beta portfolios, from 5-factor model
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
VW-Ret t-stat FFC-Alpha t-stat
Low Portf 1 0.203 0.59 -0.363 -2.032 0.494 1.67 0.020 0.143 0.512 1.93 0.123 0.954 0.374 1.49 -0.032 -0.265 0.468 1.90 -0.010 -0.096 0.396 1.69 -0.079 -0.677 0.378 1.68 -0.092 -0.918 0.247 1.15 -0.228 -2.309 0.563 2.69 0.170 1.60
10 0.505 2.41 0.025 0.2711 0.446 2.17 0.010 0.1012 0.470 2.29 -0.010 -0.1113 0.496 2.31 0.041 0.4214 0.556 2.54 0.004 0.0415 0.596 2.79 0.056 0.5116 0.496 2.21 -0.001 -0.0117 0.578 2.45 -0.068 -0.6118 0.668 2.82 0.065 0.5319 0.538 2.05 -0.110 -0.79
High Portf 20 0.719 2.25 0.128 0.71
High-Low 0.517 2.11 0.491 1.97
Bond-ILLIQ beta portfolios, from 5-factor model
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
1971-1990 1991-2009
VW-Ret t-statFFC-Alpha t-stat VW-Ret t-stat
FFC-Alpha t-stat
Low Portf 1 -0.025 -0.05 -0.343 -1.52 Portf 1 0.420 0.85 -0.343 -1.22
2 0.414 1.01 0.005 0.03 2 0.549 1.27 -0.013 -0.06
3 0.454 1.19 0.271 1.54 3 0.540 1.46 0.032 0.17
4 0.362 1.01 0.097 0.59 4 0.342 0.97 -0.167 -0.87
5 0.367 1.04 0.002 0.02 5 0.551 1.61 0.017 0.10
6 0.427 1.34 0.112 0.79 6 0.348 1.01 -0.237 -1.23
7 0.313 0.94 0.087 0.68 7 0.426 1.40 -0.154 -0.99
8 0.159 0.49 -0.195 -1.47 8 0.311 1.11 -0.182 -1.27
9 0.505 1.58 0.265 2.01 9 0.599 2.24 0.192 1.22
10 0.401 1.26 0.139 1.17 10 0.582 2.13 0.040 0.30
11 0.309 0.98 0.020 0.18 11 0.565 2.19 0.138 0.98
12 0.391 1.31 -0.013 -0.12 12 0.537 1.89 0.037 0.25
13 0.398 1.25 -0.015 -0.13 13 0.580 2.00 0.141 0.92
14 0.577 1.78 0.156 1.31 14 0.507 1.72 -0.076 -0.46
15 0.600 1.86 0.148 1.21 15 0.583 2.09 0.029 0.17
16 0.456 1.33 0.096 0.74 16 0.508 1.77 0.020 0.12
17 0.484 1.41 0.005 0.04 17 0.647 2.01 -0.077 -0.45
18 0.536 1.51 0.061 0.39 18 0.784 2.50 0.143 0.78
19 0.390 1.01 -0.109 -0.66 19 0.674 1.90 -0.054 -0.25
HighPortf
200.379 0.82 -0.205 -0.96
Portf 20
1.072 2.42 0.439 1.57
High-Low 0.403 1.29 0.138 0.43 High-Low 0.652 1.71 0.782 2.01
Size-Bond ILLIQ Beta quintile portfolios (1/1971 to 12/2009)
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
FFC-Alpha t-statistics
Size 1 2 3 4 Size 5Small-
Big Size 1 2 3 4 Size 5Small-
Big
Beta 1 -0.283 -0.192 -0.168 -0.004 0.034 -0.317 Beta 1 -2.16 -1.72 -1.50 -0.04 0.40 -2.03
2 0.118 -0.007 0.127 0.077 -0.111 0.229 2 0.98 -0.07 1.37 0.86 -1.57 1.76
3 -0.018 0.029 0.180 0.050 0.000 -0.017 3 -0.16 0.30 1.94 0.59 -0.01 -0.14
4 -0.031 -0.001 0.092 0.003 0.010 -0.041 4 -0.27 -0.01 0.98 0.03 0.13 -0.34
Beta 5 0.066 -0.090 0.102 -0.056 0.006 0.061 Beta 5 0.46 -0.72 0.80 -0.52 0.06 0.4
High-Low 0.350 0.102 0.270 -0.053 -0.028
High-Low 2.23 0.71 2.11 -0.41 -0.18
Amihud ILLIQ-Bond ILLIQ Beta quintile portfolios (1/1971 to 12/2009)
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
FFC-Alpha t-statistics
Low-ILLIQ 2 3 4
High-ILLIQ
High-Low
Low-ILLIQ 2 3 4
High-ILLIQ
High-Low
Beta 1 0.054 -0.080 -0.038 -0.113 -0.321 -0.375 Beta 1 0.60 -0.73 -0.34 -1.03 -2.31 -2.22
2 -0.136 0.117 0.047 0.099 0.240 0.376 2 -1.93 1.33 0.50 0.98 2.13 3.08
3 -0.012 0.064 0.179 0.140 0.042 0.054 3 -0.17 0.70 1.92 1.40 0.38 0.44
4 -0.009 0.027 0.081 0.102 -0.155 -0.146 4 -0.11 0.30 0.81 1.03 -1.38 -1.18
Beta 5 -0.014 0.017 0.027 0.060 0.170 0.184 Beta 5 -0.13 0.16 0.23 0.50 1.23 1.23
High-Low -0.068 0.097 0.066 0.173 0.491
High-Low -0.43 0.69 0.49 1.24 2.95
The model
The loadings are pre-estimated from portfolios 10sizex10bond-beta (similar to Fama-French 1992)
Cross-Sectional Fama-MacBeth Regressions
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
tititti ZRE ,1,0
titiiti fR ,,0,
Risk Premiums
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Firm Characteristics
MKT SMB HML UMD Bond-ILLIQ
Sizet-1 Amihudt-1 B/Mt-12
-0.003(0.76)
0.004(2.78)
-0.003(0.95)
0.001(0.46)
0.004(1.84)
0.004(2.74)
-0.002(0.54)
0.001(0.38)
0.005(2.02)
0.006(1.54)
0.003(2.28)
-0.003(1.04)
0.003(1.26)
0.001(0.67)
0.006(1.45)
0.003(2.06)
-2.7e-11(0.57)
-0.001(2.44)
0.002(3.81)
Asset fire sales (Coval and Stafford, JFE, 2007) – fund manager needs to liquidate at below fundamental values when a fund underperforms and investors withdraw
Capital-constrained assets are even more difficult to liquidate
The main hypothesis: This extra risk of holding capital-constrained assets should have extra reward
Active Equity Mutual Funds and Funding Liquidity
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Active Equity Mutual Funds – 2,546 funds, 1/1990 to 12/2009
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
1[Low]
2 3 4 5 6 7 8 9 10[High]
High-Low
ExcessReturn
-0.420(1.88)
-0.286(2.32)
-0.219(2.42)
-0.191(3.30)
-0.190(4.05)
-0.126(2.90)
-0.066(1.29)
0.046(0.49)
0.115(0.92)
0.406(1.89)
0.826(2.23)
FFC-Adjusted Excess Return
-0.548(2.51)
-0.375(3.22)
-0.288(3.37)
-0.210(3.58)
-0.206(4.37)
-0.131(2.97)
-0.051(0.97)
0.084(0.89)
0.207(1.68)
0.499(2.29)
1.046(2.87)
Bond Illiquidity-Beta Sorted Portfolios, monthly returns, 24-month rolling window
H1: Small size funds with higher bond illiquidity beta portfolios have higher risk-adjusted returns compared to medium and large funds with high/low beta portfolios
H2: Funds with higher expenses and higher bond illiquidity beta portfolio have higher risk adjusted returns compared to funds with low expenses and low/high beta portfolios
H3: Funds with higher turnover and higher bond illiquidity beta portfolio have higher risk adjusted returns compared to funds with low turnover and low/high beta portfolios
Active Equity Mutual Funds and Funding Liquidity: Hypotheses
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Fund Size and Bond Illiquidity Risk Portfolios
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
FFC-Alpha t-statistics
Size 1[Small 2 3 4
Size 5[Big]
Small-Big Size 1 2 3 4 Size 5
Small-Big
Beta 1 [low] -0.429 -0.567 -0.524 -0.443 -0.313 0.116 Beta 1 2.46 3.14 2.95 2.51 2.21 1.72
2 -0.261 -0.296 -0.310 -0.252 -0.171 0.90 2 3.51 3.73 3.61 3.39 2.49 1.51
3 -0.182 -0.213 -0.182 -0.170 -0.117 0.065 3 2.85 4.14 3.78 3.64 2.63 1.03
4 0.001 0.070 -0.034 0.017 0.056 0.054 4 0.02 0.57 0.48 0.24 1.03 0.84
Beta 5 [high] 0.432 0.384 0.269 0.313 0.379 -0.053 Beta 5 2.38 2.06 1.59 1.78 2.73 0.68
High-Low 0.861 0.951 0.793 0.756 0.692
High-Low 2.81 3.13 2.82 2.63 2.76
Fund Expenses and Bond Illiquidity Risk Portfolios
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
FFC-Alpha t-statistics
Expense1
[Small 2 3 4
Expense5
[Big]Small-
Big Expen
se1 2 3 4Expen
se5Small-
Big
Beta 1 [low] -0.341 -0.438 -0.524 -0.503 -0.473 -0.132 Beta 1 2.94 2.81 3.31 2.92 2.05 0.79
2 -0.231 -0.304 -0.292 -0.217 -0.236 -0.005 2 3.47 4.03 3.96 2.49 2.12 0.05
3 -0.183 -0.137 -0.192 -0.122 -0.147 0.037 3 3.67 2.94 3.72 1.68 2.40 0.43
4 -0.053 -0.007 0.016 0.070 0.034 0.087 4 1.03 0.13 0.23 0.81 0.31 0.74
Beta 5 [high] 0.227 0.247 0.370 0.365 0.524 0.297 Beta 5 1.80 1.70 2.18 1.99 2.19 2.00
High-Low 0.567 0.685 0.894 0.869 0.997
High-Low 2.57 2.56 3.19 2.98 2.75
Fund Turnover and Bond Illiquidity Risk Portfolios
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
FFC-Alpha t-statistics
Turnover1
[Small] 2 3 4
Turnover5
[Big]Small-
Big Turnover1 2 3 4
Turnover5
Small-Big
Beta 1 [low] -0.469 -0.503 -0.383 -0.425 -0.426 0.043 Beta 1 3.54 3.73 2.81 2.27 1.74 0.20
2 -0.322 0.313 -0.267 -0.188 -0.127 0.195 2 3.35 4.16 3.85 2.31 0.85 1.06
3 -0.234 0.231 -0.234 -0.119 0.048 0.282 3 4.28 4.72 4.78 2.10 0.37 1.76
4 -0.094 0.091 -0.061 0.107 0.245 0.340 4 1.55 1.79 0.95 0.82 1.76 2.07
Beta 5 [high] 0.199 0.160 0.242 0.359 0.546 0.347 Beta 5 1.72 1.15 1.63 1.83 2.54 2.40
High-Low 0.667 0.663 0.625 0.785 0.971
High-Low 2.91 2.69 2.52 2.65 2.87
The effect of Bond Illiquidity Risk on fund performance: Panel Regression
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
Alpha Alpha
Bond ILLIQ betat-1 0.635(2.07)
0.659(1.97)
MKT betat-1 -2.101(0.82)
SMB betat-1 3.128(0.92)
HML betat-1 -1.173(0.30)
UMD betat-1 -16.448(1.05)
Expensest-1 -0.705(1.46)
-0.520(1.19)
Log(TNA)t-1 -0.936(2.17)
-0.688(1.38)
Log(TNA)2t-1 0.058
(1.69)0.051(1.40)
Turnovert-1 -0.002(0.31)
0.007(1.79)
Log(Fund Age)t-1 -0.086(0.38)
0.065(0.24)
Log(Manager Tenure)t-1
0.271(1.44)
0.108(0.74)
Alphat-1 0.561(6.51)
0.529(3.44)
R2 0.30 0.31
This paper links Treasury bond illiquidity and funding liquidity
Applications: stocks with higher bond illiquidity betas earn higher risk-adjusted returns compared to lower bond illiquidity beta stocks (49 basis points per month)
Bond illiquidity beta has positive and significant risk premium after controlling for Fama-French and Carhart factors and firm characteristics such as size, book-to-market and stock illiquidity.
Funds in the highest bond illiquidity beta decile outperform funds in the lowest decile by about 80 basis points per month.
Smaller funds and higher bond illiq-beta – higher alpha
Higher expenses and higher bond illiq-beta – higher alpha
Higher turnover and higher bond illiq-beta – higher alpha
Conclusions
Christoffersen, Goyenko, Jacobs, and Karoui Illiquidity Premia in the Equity Options MarketRuslan Goyenko Treasury Illiquidity and Funding Liquidity Risk
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