Institutional Ownership, Liquidity And Liquidity Risk
Prasun Agarwal2009
Sign up for access to the world's latest research
checkGet notified about relevant papers
checkSave papers to use in your research
checkJoin the discussion with peers
checkTrack your impact
Abstract
v I realized the importance of fellow students towards enriching graduate life. I thank my classmates from the economics program, Jayant Ganguli, Koralai Kirabaeva, Amit Anshumali, and Serif Aziz, for being both excellent colleagues and great friends, and for always being just a phone call away whenever I needed a second opinion. I also want to thank my classmates from the finance program, Vikrant Tyagi, William Weld, and David Pompilio, who offered key advice and answered lots of questions during the initial years of graduate school, and with whom I later had many helpful discussions. I also want to thank both Numeric Investors, LLC, and GMO, LLC, for providing me with research infrastructure to carry out much of the research in Chapter 3. Lastly, I want to thank a few of my colleagues, George Sakoulis and Kirsten Syverson at Numeric, and Tom Bok at GMO, who kept encouraging me to finish my thesis after I began work there. I also want to gratefully acknowledge the help from staff at CISER, especially Carol Murphree, for being so supportive of all my computing and data needs, and Paula Douglass for proofreading the thesis. I also want to thank Sai Maudgalya, who has been a source of constant encouragement over the last ten years. In the interest of space, I will refrain from mentioning more names but wish all the best to all my colleagues at Cornell. vi TABLE OF CONTENTS BIOGRAPHICAL SKETCH.
Related papers
Institutional Ownership and Stock Liquidity
Social Science Research Network, 2007
The study examines the relationship between institutional ownership and liquidity of stocks, focusing on the effect of institutions' information advantage on liquidity. The information advantage of institutions can affect liquidity through two channels: adverse selection and information efficiency. The adverse selection effect results from an increase in information asymmetry. The information efficiency effect, however, results from an increase in competition among institutions. Competition promotes the rate at which private information is incorporated into prices, reducing uncertainty about future payoffs. I find evidence of a nonmonotonic (Ushaped) relationship between the fraction of shares of a firm held by institutions and various measures of stock liquidity. This evidence of a nonmonotonic relationship strongly suggests that the two effects coexist and interact with each other. The effect of information advantage of institutions on liquidity also varies with the amount of publicly available information and asset risk. My evidence indicates that institutional ownership (Granger) causes liquidity, allaying, to an extent, concerns that findings are a result of institutions' preference for liquid stocks. Lastly, I document that institutional investor characteristics, such as investment horizon and risk aversion, also affect liquidity. Liquidity decreases with both increases in fraction of equity held by longterm investors and risk aversion of institutional investor.
Liquidity and asset prices: Financial management implications
Financial Management, 1988
The Value of Liquidity
2008
We present a game-theoretic example that helps to illustrate the value of liquidity. These insights are applicable to hedge fund investors since hedge funds have different lock-up and redemption terms. This game also shows the danger of relying on intuition to determine the value of liquidity. We also demonstrate that the value of liquidity is different for different types of investors; the value is less for investors with less ability. Liquidity has become an increasingly important issue in the alternative
The hidden costs of stock market liquidity
Journal of Financial Economics, 1993
The seemingly unrelated problems of stock market liquidity and manager-stockholder contracting are closely intertwined. Active stockholders who reduce agency costs by providing internal monitoring also reduce stock liquidity by creating information asymmetry problems. Conversely, stock liquidity discourages internal monitoring by reducing the costs of 'exit' of unhappy stockholders. The U.S. has exceptionally many actively-traded firms with widely-diffused stockholding because public policy has favored stock market liquidity over active investing. And, the benefits of stock market liquidity must be weighed against the costs of impaired corporate governance. (a referee), Clifford Smith (the editor), and numerous colleagues at Harvard Business School provided useful comments and suggestions.
Forthcoming in Journal of Financial Economics
2008
gies in Asset Allocation and Risk Management(Brussels), as well as seminar participants at the HEC School of Management Paris and the universities of Amsterdam, Bonn, Leuven and Tilburg for helpful comments and suggestions. We gratefully acknowledge nancial assistance from FWO-Flanders under
Essays on liquidity
2017
This thesis presents three theoretical models in which to coach the debate regarding the liquidity problems that arose during the US financial crisis and the European sovereign debt crisis. Chapter one analyzes the interplay between optimal capital and liquidity requirements in a risk-shifting framework. Chapter 2 shows why holding risky liquid assets might reduce the bank's illiquidity risk. Finally, Chapter 3 studies to what extent an increment in non-performing loans and the phenomenon of deposit flight Will have different impacts on a bank's access to external funding through their different impact on the balance sheet.
Disclosure and liquidity
Nº.: UC3M Working Papers. …, 2005
♦ Mikel Tapia acknowledges research support from Ministerio de Ciencia y Tecnología grant BEC2002-00279. Work supported in part by the European Community's Human Potential Programme under contract HPRN-CT-2002-00232, MICFINMA. Marco Trombetta and Mónica ...
Essays on liquidity of U.S. common stocks
2012
In Chapter 1, I find that stock characteristics do predict a stock's time-varying liquidity beta, i.e. its sensitivity to market, with the effect varying according to the assumed holding period using data on 30 small, medium, and large cap stocks between 1997 and 2002. I also find that liquidity is a priced factor for stock return even after controlling for market and stock measures of risk such as estimates of market volatility and stock level volatility. In order to mitigate problems arising from a small panel, I also test the returns model with ARCH errors on a larger sample of 2000 stocks. Chapter 2 accounts for endogenous liquidity in a standard asset pricing model. Loss of liquidity, especially during times of crises, needs to be incorporated into models of financial assets so as to forecast returns correctly. To identify the effect of endogenous stock liquidity
Essays in Liquidity and Financial Markets
2018
This thesis presents three studies related to the effects of liquidity on financial markets. The first topic explores the relationship between funding liquidity and credit default swap (CDS) spreads. Using panel estimations, this study provides evidence that a tightening of funding liquidity increases spreads, effect which is three times larger in magnitude for high-CDS entities compared to low-CDS firms. Moreover, this paper highlights the impact of the 'CDS Small Bang' regulatory changes, especially the introduction of fixed coupons which induced upfront fees for trading CDSs. We find that after the introduction of the fees, funding liquidity changes have a much larger and more significant impact on CDS spread changes. The second study presents an empirical investigation of the theoretical predictions of Brunnermeier and Pedersen (2009) connecting funding liquidity with market liquidity and volatility and an extension of these linkages to CDS spreads. Specifically, in a Eu...
Related topics
Related papers
No. 2008/23 Endogenous Systemic Liquidity Risk
2015
The Center for Financial Studies is a nonprofit research organization, supported by an association of more than 120 banks, insurance companies, industrial corporations and public institutions. Established in 1968 and closely affiliated with the University of Frankfurt, it provides a strong link between the financial community and academia. The CFS Working Paper Series presents the result of scientific research on selected topics in the field of money, banking and finance. The authors were either participants in the Center´s Research Fellow Program or members of one of the Center´s Research Projects. If you would like to know more about the Center for Financial Studies, please let us know of your interest.
On the hidden side of liquidity
The European Journal of Finance, 2012
for their suggestions and comments. We gratefully acknowledge helpful discussions with ten practitioners from Spanish fund managers and financial services organizations (Bancaja, CAM, Fibanc, Gesamed, Inverseguros, and Morgan Stanley). Roberto Pascual also acknowledges the financial sponsorship of the Fulbright Grant and the Spanish Ministry of Education, Culture and Sports. We thank Sociedad de Bolsas for providing the database. Financial support for this project was obtained from the Instituto Valenciano de Investigaciones Económicas (IVIE) and the Spanish DGICYT projects BEC2001-2552-C03-03 and BEC2003-09067-C04-04. A former version of this paper was awarded with the 2004 Joseph de La Vega Prize by the Federation of European Securities Exchanges (FESE).
Job Market Paper Institutional Investors and Liquidity Risk
2011
I analyze the effects of institutional ownership on liquidity risk in the cross-section of stocks. Using a unique, hand-collected data set of hedge fund ownership, I examine whether stocks held by hedge funds as marginal investors are more sensitive to changes in aggregate liquidity than comparable stocks held by other types of institutions or by individuals. After controlling for institutional preferences for stock characteristics, I find a positive relationship between hedge fund ownership and liquidity risk, and a negative relationship between bank ownership and liquidity risk. In addition, stocks held by hedge funds experience significant negative abnormal returns during liquidity crises, whereas stocks held by banks experience significant positive abnormal returns. These findings support the theory of Brunnermeier and Pedersen (2009) that funding constraints of leveraged speculators lead to a greater liquidity risk, and the theory of Gatev and Strahan (2006) that banks have a u...
The liquidity management of institutional investors and the pricing of liquidity risk
2016
This dissertation studies how mutual funds and hedge funds manage their liquidity and reduce trading costs, and the pricing of liquidity level and liquidity risk in financial markets. Chapter 1 documents the trading behavior of actively managed equity mutual funds from the perspective of their trading cost management. Chapter 2 analyzes what size for the liquidity risk premium can be justified theoretically. Here we calculate the liquidity risk premiums demanded by large investors by solving a dynamic portfolio choice problem with stochastic price impact of trading, CRRA utility and a time-varying investment opportunity set. Chapter 3 studies how hedge funds adjusted their holdings of liquid and illiquid stocks before, during and after the 2008 financial crisis.
University Press Scholarship Online Oxford Scholarship Online Market Liquidity: Theory, Evidence, and Policy
Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide.
Liquidity and Liquidity Risk in the Corporate Bond Market
ciim.ac.cy
and the MIT Finance and Economics Lunch Seminar for helpful comments and discussions. We are particularly grateful to Jean Helwege for her extremely valuable suggestions. Jacoby thanks the Social Sciences and Humanities Research Council of Canada for financial support. Any errors are our responsibility.
Institutional Liquidity Needs and the Structure of Monitored Finance
Review of Financial Studies, 2003
A financial institution that finances and monitors firms learns private information about these firms. When the institution seeks funds to meet its own liquidity needs, it faces adverse selection ("liquidity") costs that increase with the risk of its claims on these firms. The institution can reduce its liquidity costs by holding debt rather than equity. Because these costs are passed through to borrowers, firms that depend on monitored finance generally prefer to give the monitoring institution debt rather than equity; an exception is a limited setting resembling venture capital. Institutions with less frequent or less severe liquidity needs have greater appetite for equity and for the debt of more risky borrowers. These predictions are consistent with general patterns of monitored finance.
Liquidity as an insurance problem
2001
Risk-averse individuals wish that assets concentrate their payoffs in states of high marginal value (that is, highly likely or low endowment states). An asset or portfolio may fail to do so, by having payoffs uncorrelated to its owner needs or, even worse, by having them inversely related. ...
Liquidity, analysts, and institutional ownership
International Review of Financial Analysis, 2011
In this paper, we investigate the empirical relationship between institutional ownership, number of analysts following and stock market liquidity. We find that firms with larger number of financial analysts following have wider spreads, lower market quality index, and larger price impact of trades. However, we find that firms with higher institutional ownership have narrower spreads, higher market quality index, and smaller price impact of trades. In addition, we show that changes in our liquidity measures are significantly related to changes in institutional ownership over time. These results suggest that firms may alleviate information asymmetry and improve stock market liquidity by increasing institutional ownership. Our results are remarkably robust to different measures of liquidity and measures of information asymmetry. find that stock prices react significantly to financial analysts' recommendations and revisions. They suggest that investors can make abnormal returns based on information provided by stock analysts in emerging markets.
Loading Preview
Sorry, preview is currently unavailable. You can download the paper by clicking the button above.