Liquidity- Another Look

From abstract:

“A portfolio’s liquidity depends not only on the liquidity of its holdings but also on its diversification. We propose simple, theoretically motivated measures of portfolio liquidity and diversification. We also develop an equilibrium model relating portfolio liquidity to fund size, expense ratio, and turnover. As the model predicts, mutual funds with less liquid portfolios have smaller size, higher expense ratios, and lower turnover. The model also yields additional predictions that we verify empirically: larger funds are cheaper, funds that trade less are larger and cheaper, and funds that are too big perform worse. We also find that mutual fund portfolios have become more liquid because both components of diversification, coverage and balance, have trended upward.”

Portfolio Liquidity and Diversification: Theory and Evidence.“, 2 Aug 2017 , Lubos Pastor (University of Chicago – Booth School of Business), Robert F. Stambaugh (University of Pennsylvania – The Wharton School), Lucian A. Taylor (University of Pennsylvania – The Wharton School)

See here.

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Meeting on 10/1/17 at 1pm, San Francisco

Our next meeting is scheduled for 10/1/17 (Sunday) at 1pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be having a discussion on asset pricing with liquidity premia. See here for paper.

Asset pricing with liquidity risk

Abstract. This paper solves explicitly a simple equilibrium model with liquidity risk. In our liquidity adjusted capital asset pricing model, a security’s required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return and liquidity. In addition, a persistent negative shock to a security’s liquidity results in low contemporaneous returns and high predicted future returns. The model provides a unified framework for understanding the various channels through which liquidity risk may affect asset prices. Our empirical results shed light on the total and relative economic significance of these channels and provide evidence of flight to liquidity.

“Asset pricing with liquidity risk.” Viral V. Acharya, Lasse Heje Pedersen, London Business School, Regent’s Park, London, NW1 4SA, UK, June 2004  See here.

Meeting on 9/17/17 at 10am, San Francisco

Our next meeting is scheduled for 9/17/17 (Sunday) at 10 am in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be having a discussion on combined momentum and mean reversion strategies. See here for paper.

Momentum and mean reversion across national equity markets

From the abstract:

“Numerous studies have separately identified mean reversion and momentum. This paper considers these effects jointly. Our empirical model assumes that only global equity price index shocks can have permanent components. This is motivated in a production-based asset pricing context, given that production levels converge across developed countries. Combination momentum-contrarian strategies, used to select from among 18 developed equity markets at a monthly frequency, outperform both pure momentum and pure contrarian strategies. The results continue to hold after corrections for factor sensitivities and transaction costs. They reveal the importance of controlling for mean reversion in exploiting momentum and vice versa.”

“Momentum and mean reversion across national equity markets.” Ronald J. Balvers, Yangru Wu, 2005.

See paper here.

Meeting on 9/3/17 at 5pm, San Francisco

Our next meeting is scheduled for 9/3/17 (Sunday) at 5pm in San Francisco on the 2nd floor lounge of the Marriott Marquis (780 Mission Street).  See here for more information about the venue. Once you enter the hotel, go to the 2nd floor using the escalator and you will see a lounge with sofas and tables. Feel free to send an email if you have trouble finding it.

We will be having a discussion on power laws. See here for paper.

Power laws, Pareto distributions and Zipf’s law

In previous sessions, we reviewed Mandelbrot’s market model, which postulates that a power law governs returns rather than a Gaussian process. The paper below explores how power laws arise so frequently in nature. From the abstract:

“When the probability of measuring a particular value of some quantity varies inversely as a power of that value, the quantity is said to follow a power law, also known variously as Zipf’s law or the Pareto distribution. Power laws appear widely in physics, biology, earth and planetary sciences, economics and finance, computer science, demography and the social sciences. For instance, the distributions of the sizes of cities, earthquakes, solar flares, moon craters, wars and people’s personal fortunes all appear to follow power laws. The origin of power-law behaviour has been a topic of debate in the scientific community for more than a century. Here we review some of the empirical evidence for the existence of power-law forms and the theories proposed to explain them.”

Power laws, Pareto distributions and Zipf’s law“, May 2006, M. E. J. Newman. Department of Physics and Center for the Study of Complex Systems, University of Michigan, Ann Arbor, MI 48109. U.S.A.

See here for the paper.