Liquidity and portfolio optimisation

This thesis presents research within empirical financial economics with focus on liquidity and portfolio optimisation in the stock market. The discussion on liquidity is focused on measurement issues, including TAQ data processing and measurement of systematic liquidity factors (FSO). Furthermore, a framework for treatment of the two topics in combination is provided. The liquidity part of the thesis gives a conceptual background to liquidity and discusses several different approaches to liquidity measurement. It contributes to liquidity measurement by providing detailed guidelines on the data processing needed for applying TAQ data to liquidity research. The main focus, however, is the derivation of systematic liquidity factors. The principal component approach to systematic liquidity measurement is refined by the introduction of moving and expanding estimation windows, allowing for time-varying liquidity co-variances between stocks. Under several liability specifications, this improves the ability to explain stock liquidity and returns, as compared to static window PCA and market average approximations of systematic liquidity. The highest ability to explain stock returns is obtained when using inventory cost as a liquidity measure and a moving window PCA as the systematic liquidity derivation technique. Systematic factors of this setting also have a strong ability in explaining a cross-sectional liquidity variation. Portfolio optimisation in the FSO framework is tested in two empirical studies. These contribute to the assessment of FSO by expanding the applicability to stock indexes and individual stocks, by considering a wide selection of utility function specifications, and by showing explicitly how the full-scale optimum can be identified using either grid search or the heuristic search algorithm of differential evolution. The studies show that relative to mean-variance portfolios, FSO performs well in these settings and that the computational expense can be mitigated dramatically by application of differential evolution

Dynamics in systematic liquidity

We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluate these methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures we find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.Liquidity (Economics)

Dynamics in systematic liquidity

We develop a principal component approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluate these methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross sectional stock liquidity and cross sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-estimates

Non-Standard Errors

In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants

Liquidity and portfolio optimisation

This thesis presents research within empirical financial economics with focus on liquidity and portfolio optimisation in the stock market. The discussion on liquidity is focused on measurement issues, including TAQ data processing and measurement of systematic liquidity factors (FSO). Furthermore, a framework for treatment of the two topics in combination is provided. The liquidity part of the thesis gives a conceptual background to liquidity and discusses several different approaches to liquidity measurement. It contributes to liquidity measurement by providing detailed guidelines on the data processing needed for applying TAQ data to liquidity research. The main focus, however, is the derivation of systematic liquidity factors. The principal component approach to systematic liquidity measurement is refined by the introduction of moving and expanding estimation windows, allowing for time-varying liquidity co-variances between stocks. Under several liability specifications, this improves the ability to explain stock liquidity and returns, as compared to static window PCA and market average approximations of systematic liquidity. The highest ability to explain stock returns is obtained when using inventory cost as a liquidity measure and a moving window PCA as the systematic liquidity derivation technique. Systematic factors of this setting also have a strong ability in explaining a cross-sectional liquidity variation. Portfolio optimisation in the FSO framework is tested in two empirical studies. These contribute to the assessment of FSO by expanding the applicability to stock indexes and individual stocks, by considering a wide selection of utility function specifications, and by showing explicitly how the full-scale optimum can be identified using either grid search or the heuristic search algorithm of differential evolution. The studies show that relative to mean-variance portfolios, FSO performs well in these settings and that the computational expense can be mitigated dramatically by application of differential evolution.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

The components of the illiquidity premium: An empirical analysis of U.S. stocks 1927-2010

This paper estimates a conditional version of the liquidity adjusted CAPM by Acharya and Pedersen (2005) using NYSE and AMEX data from 1927 to 2010 to study the illiquidity premium and its variation over time. The components of the illiquidity premium is in this model derived as the level of expected illiquidity together with three types of illiquidity risks. We measure illiquidity of individual stocks by the efficient spread proxy developed in Holden (2009) and employ illiquidity sorted portfolios as test assets. The average annual illiquidity premium is estimated to 1.55%, the respective contributions from illiquidity level being 1.15% and from the three different illiquidity risks 0.40%. Results also indicate that commonality risk is the least important component in the illiquidity risk premium, while a component related to the hedging of wealth shocks is the most important. The illiquidity premium varies substantially over time, with peaks in downturns and crises, but with no general tendency to decrease over time

Chad - towards democratisation or petro-dictatorship?

This study provides a background of the socio-political situation in Chad and the oil project, and analyses how the two will develop and interact in the future. A key feature is an analysis of the incentives in the oil project and their possible future changes. Chad is currently undergoing two processes of significant importance for its future development - political democratisation and transformation into an oil economy. For a country plagued with civil war for decades until 1990, and known as one of the poorest and most corrupt states in the world, this is a real challenge. The oil export started in late 2003, and boosted the economy in 2004. To avoid the disastrous experiences of most poor African oil states, unique oil management, control mechanisms and other conditionalities have been imposed by the World Bank - much thanks to pressure from the civil society and the international community. If implemented well, Chad may become a model for how a poor resource-rich country is able to promote socio-economic development and poverty reduction. However, this demands a close and coordinated cooperation between the Chadian government and the civil society, based on accountability and good governance, and with continuous support of the World Bank and the international community. The situation is fragile and progress is uncertain. If a broader economic development is achieved, conditions for an improved democratisation can be created in the long term.The Chadian oil project deserves continued close attention and monitoring.CONTENT -- Introduction -- Conceptual Framework -- State and Politics in Africa: Chad's Democratisation Process -- Natural Resources: The Chad-Cameroon Oil Project -- Conclusion -- Reference

Asset Illiquidity and Corporate Hedging

Distressed firms that are forced to liquidate assets in inefficient markets often have to accept prices that are substantially lower than the fair asset value. This asset illiquidity discount aggravates the financial situation of such firms and should be accounted for in risk management. This paper is the first to analyze financial hedging as a tool for avoiding exposure to the asset illiquidity discount. In our model the firm trades off the benefit of lowering the probability of asset fire sales against the cost of underinvestment resulting from the drain on cash when the firm buys insurance. We use the case of Saga Petroleum ASA, a Norwegian oil exploration company, to illustrate this tradeoff

The components of the illiquidity premium: An empirical analysis of U.S. stocks 1927-2010

This paper estimates a conditional version of the liquidity adjusted CAPM by Acharya and Pedersen (2005) using NYSE and AMEX data from 1927 to 2010 to study the illiquidity premium and its variation over time. The components of the illiquidity premium is in this model derived as the level of expected illiquidity together with three types of illiquidity risks. We measure illiquidity of individual stocks by the efficient spread proxy developed in Holden (2009) and employ illiquidity sorted portfolios as test assets. The average annual illiquidity premium is estimated to 1.55%, the respective contributions from illiquidity level being 1.15% and from the three different illiquidity risks 0.40%. Results also indicate that commonality risk is the least important component in the illiquidity risk premium, while a component related to the hedging of wealth shocks is the most important. The illiquidity premium varies substantially over time, with peaks in downturns and crises, but with no general tendency to decrease over time.illiquidity level premium; illiquidity risk premium; conditional LCAPM; effective tick

Oljepriskänslighet på Sveriges och EU:s aktiemarknader

Oljeprisets påverkan på svensk och europeisk ekonomi är högaktuell – det skapar dagligen rubriker i massmedia. Inte minst på aktiemarknaden iakttas oljepriset noggrant. Denna studie undersöker huruvida statistiska samband mellan oljepriset och olika aktieindex kan påvisas, och även huruvida dessa går att utnyttja för prognostisering. Fyra branschindex – industri, kemi, transport och råvaror – samt generalindex, för Sverige respektive EU, undersöks. Kointegrations- och regressionsanalys används för att undersöka sambanden mellan oljepris och aktieindex, och resultaten tillämpas sedan för prognostisering. Tre statiska prognosmetoder nyttjas: konstanta parametrar, expanderande informationsfönster och rullande informationsfönster. Studien visar att ett flertal av indexen är oljeprisrelaterade, men att sambanden bara kan utnyttjas för prognostisering av det svenska råvaruindexet och det europeiska industriindexet