Journal articles: 'Illiquidity cost'

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Ortiz-Molina, Hernán, and Gordon M. Phillips. "Real Asset Illiquidity and the Cost of Capital." Journal of Financial and Quantitative Analysis 49, no. 1 (February 2014): 1–32. http://dx.doi.org/10.1017/s0022109014000210.

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AbstractWe show that firms with more illiquid real assets have a higher cost of capital. This effect is stronger when real illiquidity arises from lower within-industry acquisition activity. Real asset illiquidity increases the cost of capital more for firms that face more competition, have less access to external capital, or are closer to default, and for those facing negative demand shocks. The effect of real asset illiquidity is distinct from that of firms’ stock illiquidity or systematic liquidity risk. These results suggest that real asset illiquidity reduces firms’ operating flexibility and through this channel their cost of capital.

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Lambert, Richard A., and Robert E. Verrecchia. "Information, Illiquidity, and Cost of Capital." Contemporary Accounting Research 32, no. 2 (September 29, 2014): 438–54. http://dx.doi.org/10.1111/1911-3846.12078.

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Belkhir, Mohamed, Mohsen Saad, and Anis Samet. "Stock extreme illiquidity and the cost of capital." Journal of Banking & Finance 112 (March 2020): 105281. http://dx.doi.org/10.1016/j.jbankfin.2018.01.005.

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Dziwok, Ewa, and Marta A. Karaś. "Systemic Illiquidity Noise-Based Measure—A Solution for Systemic Liquidity Monitoring in Frontier and Emerging Markets." Risks 9, no. 7 (July 1, 2021): 124. http://dx.doi.org/10.3390/risks9070124.

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The paper presents an alternative approach to measuring systemic illiquidity applicable to countries with frontier and emerging financial markets, where other existing methods are not applicable. We develop a novel Systemic Illiquidity Noise (SIN)-based measure, using the Nelson–Siegel–Svensson methodology in which we utilize the curve-fitting error as an indicator of financial system illiquidity. We empirically apply our method to a set of 10 divergent Central and Eastern Europe countries—Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Slovakia—in the period of 2006–2020. The results show three periods of increased risk in the sample period: the global financial crisis, the European public debt crisis, and the COVID-19 pandemic. They also allow us to identify three divergent sets of countries with different systemic liquidity risk characteristics. The analysis also illustrates the impact of the introduction of the euro on systemic illiquidity risk. The proposed methodology may be of consequence for financial system regulators and macroprudential bodies: it allows for contemporaneous monitoring of discussed risk at a minimal cost using well-known models and easily accessible data.

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Lindsey, Richard R., and Andrew B. Weisman. "Forced Liquidations, Fire Sales, and the Cost of Illiquidity." Journal of Private Equity 20, no. 1 (November 30, 2016): 45–57. http://dx.doi.org/10.3905/jpe.2016.20.1.045.

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Lindsey, Richard R., and Andrew B. Weisman. "Forced Liquidations, Fire Sales, and the Cost of Illiquidity." Journal of Portfolio Management 42, no. 2 (January 31, 2016): 43–55. http://dx.doi.org/10.3905/jpm.2016.42.2.043.

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Rogers, L. C. G., and Surbjeet Singh. "THE COST OF ILLIQUIDITY AND ITS EFFECTS ON HEDGING." Mathematical Finance 20, no. 4 (September 22, 2010): 597–615. http://dx.doi.org/10.1111/j.1467-9965.2010.00413.x.

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Enow, Samuel Tabot. "Exploring illiquidity risk pre and during the COVID-19 pandemic era: Evidence from international financial markets." Journal of Accounting and Investment 24, no. 3 (June 23, 2023): 676–82. http://dx.doi.org/10.18196/jai.v24i3.18139.

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Research aims: Illiquidity risk is one of the complex issues that institutional investors and market participants continually face over time. It is because the constructs of illiquidity risk are sometimes complicated, robust, and not so evident in secondary markets. Hence, this study aims to empirically explore illiquidity risk before and during the COVID-19 pandemic to understand how much investors were expected to lose if they invested in stock markets during these periods.Design/Methodology/Approach: This study used a GARCH model and the Amihud illiquidity ratio to achieve its objective. Trading volumes and price returns for the JSE, CAC 40, DAX, Nasdaq, BIST 100, and SSE were from June 30, 2017, to June 30, 2019, and January 1, 2020, to December 31, 2021.Research findings: As expected, the findings revealed higher illiquidity risk during periods of financial distress, such as the COVID-19 pandemic. During the financial crisis, investors could lose up to $22268.44 a day in less developed markets, such as the JSE, while the average loss in developed markets ranged between $0.22 to $11.53 in the Nasdaq and DAX, respectively. On average, a much lower figure was observed before the financial crisis. The BIST100, CAC 40, DAX, and Nasdaq are excellent options for those seeking lower-risk premiums.Theoretical and Practitioner/Policy implication: Policies such as adequate market microstructure and greater transparency in trading are strongly recommended for less developed markets, especially during periods of financial distress. Also, the findings of this study provide valuable insight into short-term traders and market participants attracted to liquid markets, where they can easily enter and exit their positions with minimal transaction costs. To the author's knowledge, this paper is the first to model illiquidity risk in stock markets.Research limitation/Implication: It is possible that the current study did not accurately capture the cost of illiquidity in the sampled financial markets and cannot be applied to other financial markets.

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ROCH, ALEXANDRE, and H. METE SONER. "RESILIENT PRICE IMPACT OF TRADING AND THE COST OF ILLIQUIDITY." International Journal of Theoretical and Applied Finance 16, no. 06 (September 2013): 1350037. http://dx.doi.org/10.1142/s0219024913500374.

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We construct a model for liquidity risk and price impacts in a limit order book setting with depth, resilience and tightness. We derive a wealth equation and a characterization of illiquidity costs. We show that we can separate liquidity costs due to depth and resilience from those related to tightness, and obtain a reduced model in which proportional costs due to the bid-ask spread is removed. From this, we obtain conditions under which the model is arbitrage free. By considering the standard utility maximization problem, this also allows us to obtain a stochastic discount factor and an asset pricing formula which is consistent with empirical findings (e.g., Brennan and Subrahmanyam (1996); Amihud and Mendelson (1986)). Furthermore, we show that in limiting cases for some parameters of the model, we derive many existing liquidity models present in the arbitrage pricing literature, including Çetin et al. (2004) and Rogers and Singh (2010). This offers a classification of different types of liquidity costs in terms of the depth and resilience of prices.

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Sorokin, Yegor, and Hyejin Ku. "Option replication in discrete time with the cost of illiquidity." Communications in Mathematical Sciences 14, no. 7 (2016): 1947–62. http://dx.doi.org/10.4310/cms.2016.v14.n7.a8.

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Chen, Jiayuan, Di Gong, and Cal Muckley. "Stock market illiquidity, bargaining power and the cost of borrowing." Journal of Empirical Finance 58 (September 2020): 181–206. http://dx.doi.org/10.1016/j.jempfin.2020.06.001.

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Nguyen, Hazel Thu-Hien. "Stock Market Liquidity: Financially Constrained Firms and Share Repurchase." Accounting and Finance Research 6, no. 4 (September 14, 2017): 130. http://dx.doi.org/10.5430/afr.v6n4p130.

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Stock illiquidity raises the cost of share ownership to outside investors and increases firms’ cost of capital. This study substantiates that shares of financially constrained firms are significantly more illiquid than shares of similar but financially unconstrained firms. Acting as buyers of last resort for their own shares, share repurchases by financially constrained firms enhance stock liquidity, which alleviates the cost of external financing and underinvestment. Increased stock liquidity improves information efficiency, inducing higher value-added from incremental capital investments. Further, higher stock liquidity lowers stock volatility and allows financially constrained firms to issue equity.

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Saeed, Sadia, Saif ul Mujahid Shah, and Saadullah Shah. "Liquidity Risks and Asset Pricing: Evidence from Developed and Emerging Markets." Journal of Independent Studies and Research-Management, Social Sciences and Economics 18, no. 2 (December 31, 2020): 65–86. http://dx.doi.org/10.31384/jisrmsse/2020.18.2.5.

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The study examines the liquidity adjusted capital asset pricing model in developed and emerging markets. Amihud measure is used to compute market liquidity. Innovations in Amihud ratio are generated through the autoregressive process to avoid autocorrelation in illiquidity data series. Decile portfolios based on illiquidity cost are formulated for each stock market. Liquidity adjusted betas are calculated at the portfolio level and then stocks as test assets have been used in the regression stage. Panel regression with fixed effect has been employed on LCAPM specifications for explaining the excess stock returns of developed and emerging markets during a period July 2005- June 2017. The findings of the study support that individual and aggregate liquidity risk price in stock markets except for Pakistan. The results of the study suggest that investors institutional or individual should consider liquidity risks for assessing the worth of assets.

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Goyal, Gauri. "Practical Applications of Forced Liquidations, Fire Sales, and the Cost of Illiquidity." Practical Applications 3, no. 4 (April 30, 2016): 1.6–5. http://dx.doi.org/10.3905/pa.2016.3.4.148.

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Asem, Ebenezer, Jessica Chung, Xin Cui, and Gloria Y. Tian. "Liquidity, investor sentiment and price discount of SEOs in Australia." International Journal of Managerial Finance 12, no. 1 (February 1, 2016): 25–51. http://dx.doi.org/10.1108/ijmf-10-2013-0106.

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Purpose – The purpose of this paper is to empirically test whether stock liquidity and investor sentiment have interactive effects on seasoned equity offers (SEOs) price discounts in Australia. Design/methodology/approach – The authors focus on the implicit cost borne by firms when issuing seasoned equity capital. This cost is measured as the relative difference between the SEO offer price and the last close price prior to the announcement of the issue. The primary measure of investor sentiment is a composite index constructed similar to that in Baker and Wurgler (2007). Findings – The results show that, in periods of deteriorating investor sentiment, the increase in SEO price discounts for firms with illiquid stocks is larger than the corresponding increase for firms with liquid stocks. This suggests that, as sentiment wanes, investors become even more concerned about illiquidity, leading to even greater required compensation for holding illiquid assets. The authors find that information asymmetry is positively related to SEO price discounts but this relation is not affected by changing investor sentiment. Research limitations/implications – Collectively, the empirical results provide support for the argument that price discount of SEOs represents compensation to investors for bearing costs associated with illiquidity. The results also lend some support to the behavioural argument that pricing of equity offers is dependent upon investor sentiment, particularly for firms with illiquid stocks. Practical implications – The ability for firms to raise capital in a cost-effective manner is critical for firm growth and stability. Investors require compensation for bearing the costs of illiquidity of their investments in equity. Accordingly, firms need to be conscious of their stocks’ existing liquidity and its influence on the cost of raising additional capital which, in turn, affects their operational stability and investment opportunities. Social implications – Ultimately, the implications of this study will assist firms in capital-raising decisions, investors in making portfolio investment decisions, and investment banks in setting offer prices on equity issues. Originality/value – To the best of the authors’ knowledge, this is the first study to examine the interaction between investor sentiment and SEO price discounts in Australia.

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Cheng, Ping, Zhenguo Lin, and Yingchun Liu. "Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application." Journal of Housing Economics 19, no. 2 (June 2010): 109–18. http://dx.doi.org/10.1016/j.jhe.2010.03.002.

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Rahman, Abdul, and Prabina Rajib. "Index Revisions, Stock Liquidity and the Cost of Equity Capital." Global Business Review 19, no. 4 (May 28, 2018): 1072–89. http://dx.doi.org/10.1177/0972150918773005.

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This study examines the stock liquidity and cost of equity capital (COEC) effects around the CNX Nifty index revisions during the period 1998–2011. To examine these effects, the inclusion (exclusion) firms are compared with their matching peers. The stock liquidity effect has been examined by using distinct liquidity measures, such as trading volume, turnover rate and illiquidity ratio. The COEC effect has been examined with the help of cost of equity, stock liquidity, firm size, leverage and inclusion (exclusion) dummies. It was found that the stocks included to the CNX NIFTY were less liquid than their matching peers were, whereas the stocks excluded were experiencing more liquidity than their matching peers. Further, the study finds an increase in the COEC for the included firms and a decrease in the COEC for the excluded firms.

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Ghaidarov, Stillian. "Analytical Bound on the Cost of Illiquidity for Equity Securities Subject to Sale Restrictions." Journal of Derivatives 21, no. 4 (May 31, 2014): 31–48. http://dx.doi.org/10.3905/jod.2014.21.4.031.

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Enow, Samuel Tabot. "Stock Market Liquidity during Periods of Distress and its Implications: Evidence from International Financial Markets." International Journal of Economics and Financial Issues 13, no. 1 (January 14, 2023): 1–6. http://dx.doi.org/10.32479/ijefi.13752.

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Traditional market pricing models assume frictionless markets with abundant liquidity. This traditional models also incorporate stock market liquidity as an exogenous cost. However, this paradigm has many shortcomings due to its inability to explain some of the problems associated with security market illiquidity. The aim of this study was to explore the concept of stock market liquidity during periods of financial distress. A Markov switching GARCH model was used to investigate market liquidity in the CAC 40, DAX, JSE, Nasdaq Index and the Nikkei-225 during the 2007-2008 financial crisis and the Covid-19 pandemic. The sample period was January 1, 2020 to December 31, 2021 and December 1, 2007 to June 30, 2009. From the findings, some financial markets where still liquid despite the financial crisis with the exception of the Nasdaq index. Conversely, all the financial markets under consideration displayed strong illiquidity during the covid-19 pandemic. In essence, the level of market depth has significantly decreased from the financial crisis to the covid-19 pandemic which may be attributed to increasing margin requirements and information asymmetry as well as price restrictions. There is an urgent need for regulatory authorities to review some of the trading regulations during financial distress.

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Nguyen, Ha D., and Huong T. H. Dang. "Bond liquidity, risk taking and corporate innovation." International Journal of Managerial Finance 16, no. 1 (September 23, 2019): 101–19. http://dx.doi.org/10.1108/ijmf-02-2019-0060.

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Purpose The purpose of this paper is to investigate how market liquidity condition of corporate bonds can affect firm investment policy, specifically its risk taking, via the disciplinary function of trading. Design/methodology/approach The paper uses fixed-effects OLS and Poisson regression for the baseline specifications. It also employs the introduction of TRACE in 2002 as an exogenous shock to bond trading infrastructure in a difference-to-difference framework to address endogeneity concerns and establish causality. Findings The paper documents a positive relationship between bond illiquidity and firms’ risk taking, specifically a one standard deviation increase in Amihud illiquidity measure is associated with nearly 20 percent increase in exploratory investments compared to CAPEX. The shift in risk taking in turn increases firms’ innovation output to some extent. Research limitations/implications The findings have important implications on firm’s risk taking and growth. The paper identifies a new channel through which firm’s choice of risk can be influenced, namely, bondholder disciplining. The study also has implications about externalities of trading beyond liquidity cost for regulators in designing market microstructure. Originality/value This is the first to study the disciplinary role of bond trading. Conventional wisdom holds that bondholders are passive creditors who do not engage in costly monitoring such as banks. The findings in this paper imply that this may not be the case.

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CHRISTODOULOU, PANAGIOTIS, NILS DETERING, and THILO MEYER-BRANDIS. "LOCAL RISK-MINIMIZATION WITH MULTIPLE ASSETS UNDER ILLIQUIDITY WITH APPLICATIONS IN ENERGY MARKETS." International Journal of Theoretical and Applied Finance 21, no. 04 (June 2018): 1850028. http://dx.doi.org/10.1142/s0219024918500280.

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We propose a hedging approach for general contingent claims when liquidity is a concern and trading is subject to transaction cost. Multiple assets with different liquidity levels are available for hedging. Our risk criterion targets a tradeoff between minimizing the risk against fluctuations in the stock price and incurring low liquidity costs. We work in an arbitrage-free setting assuming a supply curve for each asset. In discrete time, we prove the existence of a locally risk-minimizing strategy under mild conditions on the price process. Under stochastic and time-dependent liquidity risk we give a closed-form solution for an optimal strategy in the case of a linear supply curve model. Finally we show how our hedging method can be applied in energy markets where futures with different maturities are available for trading. The futures closest to their delivery period are usually the most liquid but depending on the contingent claim not necessarily optimal in terms of hedging. In a simulation study, we investigate this tradeoff and compare the resulting hedge strategies with the classical ones.

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Chaieb, Ines, Vihang Errunza, and Rajna Gibson Brandon. "Measuring Sovereign Bond Market Integration." Review of Financial Studies 33, no. 8 (September 19, 2019): 3446–91. http://dx.doi.org/10.1093/rfs/hhz107.

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Abstract We find that the degree and dynamics of sovereign bond market integration across 21 developed and 18 emerging countries is significantly heterogeneous. We show that better spanning can significantly enhance market integration through dissipating local risk premiums. Integration of the sovereign bond markets increases by about 10% on average, when a country moves from the 25th to the 75th percentile as a result of higher political stability and credit quality, lower inflation and inflation risk, and lower illiquidity. The 10% increase in integration leads to, on average, a decrease in the sovereign cost of funding of about 1% per annum. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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Anderson, Anthony Jerome, and Michael Stuart Long. "Explaining the On-The-Run Puzzle with Corporate Bonds." Review of Pacific Basin Financial Markets and Policies 20, no. 02 (May 24, 2017): 1750008. http://dx.doi.org/10.1142/s0219091517500084.

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The on-the-run phenomenon is regularly found in the bond markets. It refers to the phenomenon of the yield difference observed when a new bond issue comes to market from the same issuer and gets a better price (lower yield given equivalent duration) from the market than the older issue. This paper proposes and tests a liquidity model to explain phenomenon introducing entropy as our liquidity measure. The yield differential results from the illiquidity cost of the older issue that has increased as a result of progressing through stages, which typically occur in an entropy process. We find that a model employing an entropy measure largely explains the on-the-run phenomenon, by accounting for over three-quarters of the liquidity differential for on-the-run corporate bonds.

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Jin, Chenjia. "Research on the Applications of Neural Network Algorithms in Deep Hedging." Applied and Computational Engineering 2, no. 1 (March 22, 2023): 714–20. http://dx.doi.org/10.54254/2755-2721/2/20220659.

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Under market completeness assumptions, hedging a portfolio of derivatives is straightforward. In view of friction, transaction costs, liquidity and other factors, a framework is presented to extend the pricing and hedging with the hedging strategy treated as a neural network. We study the deep hedging model under incomplete market constraints such as frictions, traction cost, permanent impacts on the market and illiquidity. We discuss the limitations of certain models concerning the applications in deep hedging with constraints. After which, we analyse the advantages of different models and their joint models and find that the hedging strategy is close to the Black-Scholes delta hedging strategy. An example is also given when training after designing two hedging models. The Black-Scholes delta hedging is indeed approximated by unsupervised learning.

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Dömötör, Barbara, and Kata Váradi. "Stock market stress from the central counterparty’s perspective." Studies in Economics and Finance 36, no. 1 (May 30, 2019): 51–62. http://dx.doi.org/10.1108/sef-03-2016-0063.

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Purpose The purpose of this paper is to investigate the possibility of monitoring stress on stock markets from the perspective of a central counterparty (CCP). Due to their balanced positions, CCPs are exposed to extreme price movements in both directions; thus, the major risk for them derives from extreme returns and market illiquidity. The authors examined the connection of the stress alarms of return- and liquidity-based measures to find an objective basis for stress measurement. Design/methodology/approach The authors defined two types of stress measures: indicators based on extreme returns and liquidity. It is suggested that the stress indicators should be based on the existing risk management methodology that examines different risk measure oversteps. The stress signals of the past nine years on the German stock market were analyzed. The authors investigated the connection between the chosen stress measures to obtain a robust measure for alarming stress. Findings Although extreme returns and illiquidity are both characteristics of stress, the correlation of returns- and liquidity-based stress indicators is low when taking daily values. On the other hand, the moving averages of the indicators correlate significantly in the case of measures of downward and upward extreme returns and liquidity measured by the relative spread. The results are robust enough to be used for monitoring stress periods. Originality/value This paper contributes to understanding the characteristics of stress periods and points to the fact that stress signals measured by different aspects can also differ within the same asset class. The moving averages of returns- and relative spread-based indicators, however, could provide a cost-effective quantitative support for the risk management of a CCP and make the margin calculation predictable for clearing members as well.

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Haveman, Robert H., and David L. Weimer. "Public Policy Induced Changes in Employment: Valuation Issues for Benefit-Cost Analysis." Journal of Benefit-Cost Analysis 6, no. 1 (2015): 112–53. http://dx.doi.org/10.1017/bca.2015.5.

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We explore the economic welfare effects of direct and indirect government-induced changes in employment under varying market conditions. We begin with a discussion of those policy-induced employment changes that seamlessly reshuffle workers among jobs in an efficient (i.e., full-employment, full-information) economy; generally such changes create few, if any, net changes in economic welfare not captured in changes in wage bills. We then turn to the effects of policy-induced employment changes in economies with two market distortions: (1) inflexible wages set by law or custom that result in involuntary unemployment during periods of deficient aggregate demand, and (2) illiquidity resulting from imperfect capital markets that prevent people from borrowing against future earnings. Induced employment changes in these circumstances impose real net social costs or generate real net social benefits beyond changes in the wage bill. We also assess the likely magnitude of the social opportunity cost of labor in the case of involuntary unemployment and imperfect liquidity, and address how the welfare effects of such employment changes should be valued. Based on currently available empirical research, we develop estimates of the opportunity costs of hiring or releasing an employee during periods of high unemployment with and without other market distortions. In contrast to conventional benefit-cost analysis practice, which treats releasing workers as having a negative opportunity cost, we estimate an opportunity cost for firing that is positive and equal to about 73% of pre-firing compensation, primarily because of the “scarring effect” of unemployment. Also in contrast to conventional practice, we estimate an opportunity cost for hiring an unemployed worker that is less than the worker’s opportunity cost of time.

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Iklimatu Adamu Umar, Ibrahim Hussaini, and Abubakar Yahaya Halad. "Working Capital Management and Firm Profitability: An Empirical Review." Management Journal for Advanced Research 3, no. 3 (June 17, 2023): 10–18. http://dx.doi.org/10.54741/mjar.3.3.2.

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Working capital management is very important for the survival of a company no matter the size of that company. Inadequate working capital or illiquidity is a major issue confronting Many Nigerian companies. The main objectives of this study is to review the impact of working capital management on the profitability. The variables used in the study were cash conversion cycle, accounts receivable, inventory and accounts payable proxies to working capital management while, return on equity and return on assets as proxies to profitability. The study adopted conceptual approach where data collected from already existing data on the impact of working capital management on profitability. it is quite clear that a positive correlation exists between working capital management and firms’ profitability. Finally, a company which maintain sufficiently low inventory levels will reduce the holding cost of the inventory which results to higher profitability. The managements of companies should improve their cash conversion cycle, focus more on credit transactions with their vendors, and decrease their receivables days’ by offering a discount to those who paid early and those paid in advance, and should maintain optimum level of inventory in order to maximize their profitability.

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Narasimhan, M. S., and Shalu Kalra. "The Impact of Derivative Trading on the Liquidity of Stocks." Vikalpa: The Journal for Decision Makers 39, no. 3 (July 2014): 51–66. http://dx.doi.org/10.1177/0256090920140304.

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Liquidity is an important factor for smooth trading for all assets including equities traded in the stock markets. Stock exchanges enable buyers and sellers to come together for transaction and in the process reduce the search cost and friction. Higher liquidity motivates more investors to participate in the stock market. Introduction of derivatives of the underlying stock increases the opportunity set available to investors and hence affect the liquidity of the underlying stock. This study examines the impact of derivative trading on the liquidity of underlying stock using price impact measure of liquidity. The price impact measure of liquidity, which actually measures illiquidity, is given by the average daily ratio of absolute return of the stock to the daily volume over a period of time. The advantage of this measure is that it is based on the observed price changes associated with trades. Two time periods have been chosen to examine the short-term and long-term impact of derivative listing on liquidity of underlying stocks. The first time period is one month pre- and post-listing and the second time period is one year pre- and post-listing. The results of this study show a shift in the volume from cash market to derivative market, decline in the number of trades, and lower volatility after the introduction of derivative trading. The illiquidity of the stocks also increased in the short run after the introduction of derivative trading and this is definitely not a desirable outcome of introduction of derivative trading. The sample has been divided into four quartiles on the basis of pre-liquidity levels to examine whether the change in liquidity is affected by the pre liquidity levels of the underlying stock. The results show that the impact of derivative trading on long-term liquidity of the market depends on the level of liquidity prior to the introduction of derivative trading. They also show an improvement in long-term liquidity after derivative trading when the liquidity of stocks prior to derivative trading was not high. In other words, derivative listing improved the liquidity of illiquid stocks significantly and served one of the basic objectives of risk management. On the other hand, long-term liquidity was marginally affected if the stocks were already liquid and it is not a matter of concern.

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Marozva, Godfrey, and Patricia Lindelwa Makoni. "The nexus between bond liquidity, stock liquidity and foreign portfolio investment." International Journal of Finance & Banking Studies (2147-4486) 10, no. 3 (September 17, 2021): 92–103. http://dx.doi.org/10.20525/ijfbs.v10i3.1348.

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The purpose of this article was to assess the impact of financial market liquidity on international capital flows in emerging markets. Specifically, the research investigates the effect of bond market liquidity and stock market liquidity on foreign portfolio investments using data for five emerging African countries, being Egypt, Kenya, Mauritius, Nigeria and South Africa, for the period 2000 to 2020. The data was sourced from the Bloomberg and World Bank (WDI) databases. Panel data analysis (fixed effects model) was undertaken using three different liquidity measures: the effective spread; Amihud’s (2002) illiquidity measure; and market impact as measured by trading volume. Our findings revealed mixed results. It was found that stock market liquidity attracted foreign portfolio investments. Although bond market liquidity, as measured by the volume of trade, promoted foreign portfolio investment, it was different for the effective spread, as the higher the effective spread, the higher the inward FPI flows, and vice versa. Results on the effects of the bond effective spread on FPI show that as long as the bonds are above the investable grade, investors are not discouraged by the cost of trading. Our findings thus confirm that FPI inflows are predisposed on liquid and efficient host country financial markets. Further, the entrance of foreign investors in the host country’s domestic financial markets, leads to the enhancing of liquidity in the local market, thus increasing risk sharing between local and foreign investors.

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Chavalle, Luc, and Luis Chavez-Bedoya. "The impact of transaction costs in portfolio optimization." Journal of Economics, Finance and Administrative Science 24, no. 48 (November 4, 2019): 288–311. http://dx.doi.org/10.1108/jefas-12-2017-0126.

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Purpose This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with respect to the ones applied in the USA, and over a few dimensions. Design/methodology/approach The paper opted for an empirical study analyzing the cost of rebalancing portfolios over a set period and dimensions. Stocks have been carefully selected using Bloomberg terminals, and portfolio designed then rebalanced using VBA programming. Over a few dimensions as type and number of stocks, holding period and trading strategy, the behavior of these different transaction costs has been compared. The analysis has been done for four different portfolios. Findings The paper provides empirical insights about how a retail investor actively trading in Peru can pay up to 14 times more in transaction costs than trading the same portfolio in the USA. These comparatively high transaction costs prevent retail investors to trade in the Peruvian stock market while fueling illiquidity to this market. Research limitations/implications The paper deals with a limited amount of Peruvian stocks. Researchers are encouraged to test the proposition further, including other dimensions. Practical implications The paper includes implications for any retail investor that wants to invest in Peruvian stocks, giving an insight about how expensive it is to actively rebalance a portfolio in Peru. Originality/value This paper fulfils an identified need to study how much it costs to actively invest on the stock market in Peru.

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Kozyr, Yuri. "Liquidity phenomenon: Essence, criteria, properties and impact on the market and investment value of assets." Economics and the Mathematical Methods 58, no. 1 (2022): 48. http://dx.doi.org/10.31857/s042473880018961-6.

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The paper is devoted to the study of the "liquidity" phenomenon from the standpoint of the economic and mathematical approach. The existing definitions are presented, as well as four criteria of liquidity and one criterion of illiquidity. Theoretical analysis of the properties of liquidity was carried out. Particular attention is paid to such transaction costs as spread and time factor. It is shown that liquidity is not an immanent category of an asset — it is a derivative of several factors characteristic of both the asset and its market environment. Based on the analysis, a microeconomic condition for emergence of liquidity phenomenon, possible methods and ways of identifying the degree of liquidity, as well as methods for assessing liquidity costs are proposed. Additionally, methods are proposed for assessing the economic benefits of liquidity and their contribution to the cost of similar and different assets. To assess the individual benefits of liquidity, the concepts of "equalizing rate" and "compensatory equivalent" were introduced, which are subsequently integrated into the methodology for assessing total and additional liquidity, expressed in relative or absolute (monetary) forms. The final part presents the classification of liquidity types, its combination with the investment value of liquid and illiquid assets, as well as an example of an end-to-end calculation of the proposed values. The appendix contains calculation formulas for assessing liquidity costs. The methodology of calculations proposed in the article can be applied when assessing the investment attractiveness of assets, choosing options for placing assets in the form of cash, securities or real estate.

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Tin, Tong Trung, and John Francis T. Diaz. "Determinants of Banks’ Capital Structure: Evidence from Vietnamese Commercial Banks." Asian Journal of Finance & Accounting 9, no. 1 (June 1, 2017): 351. http://dx.doi.org/10.5296/ajfa.v9i1.11150.

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This paper investigates the important factors influencing capital structure decisions. The study focuses on the bank leverage of thirty-one Vietnamese commercial banks from 2009 to 2014, because they play a key role as financial catalysts in the growing economy of Vietnam. The analysis employs multiple linear panel regression models, namely, Ordinary Least Squares (OLS), Fixed Effects (FE), and Random Effects (RE). This research examines five bank-specific factors (i.e., size, profitability, growth rate, taxation and business risk), and three financial market and economic variables (i.e., stock market condition, economy, and inflation) influencing capital structure with debt ratio as the dependent variable. Both the OLS and FE models agree that a Vietnamese bank’s size positively affects leverage, which means that the larger the bank, the more debt is incurred. Both models also determine that stock market and economic conditions have negative effects, which implies that in good market conditions, banks lessen their debt loads. In dividing Vietnamese commercial banks into three groups of sizes (i.e., large, medium-sized and small banks) based on chartered capital, both the OLS and RE models agree that size is a positively contributing factor to leverage. However, unlike large Vietnamese banks, medium-sized and small-sized banks tend to still carry a relatively high amount of debt because they are commonly ignored by the equity markets for reasons of illiquidity and instability, pushing them to rely on borrowing funds even to the point of having higher interest rates. Another interesting finding of this paper is that, only small-sized Vietnamese banks’ leverage is negatively affected by stock market and economic conditions. Findings of this paper are robust in using two panel regression models, and can help Vietnamese banks’ managers have a general perspective regarding capital structure determinants. This study also offers insights in creating appropriate strategies to controlling factors affecting banks’ leverage to achieve the target capital structure that minimizes the cost of capital and maximizes profitability.

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Abbott, Ashok Bhardwaj. "Cost of Illiquidity: Marketability and Liquidity Discounts in a Margrabe Exchange Option Framework." Journal of Forensic Accounting Research, September 1, 2023, 1–30. http://dx.doi.org/10.2308/jfar-2023-006.

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ABSTRACT Market declines of 2008–2009 and 2022–2023 brought renewed attention to the issue of illiquidity and the attendant costs faced by the stockholders. Margrabe exchange option-based models have been employed widely for estimating the cost of illiquidity (price risk). These models estimate the exchange ratio for two assets where the future price of both assets is unknown. Treating one of the assets as a numeraire, or currency in which the other asset is priced, simplifies the model and makes it easily tractable. Some authors have ignored this distinction, leading to inflated estimates for illiquidity discounts (sometimes exceeding 100 percent, a logical fallacy). In this paper, I present a uniform framework (the Margrabe exchange option) comparing the estimated cost of illiquidity under different information asymmetry assumptions. Empirical results presented are consistent with the theoretical predictions in that the expected rank order for estimated costs under different formulations is preserved. JEL Classifications: C52; D47; D82; G13; K22.

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34

Herath, H. M. K. M., and S. M. R. K. Samarakoon. "Role of Liquidity Risk in Asset Pricing: Evidence from Sri Lanka." Proceedings of International Conference on Business Management 17 (September 19, 2021). http://dx.doi.org/10.31357/icbm.v17.5135.

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Securities liquidity varies over time, which leads to equity return volatility. It implies that the liquidity in the capital markets is a significant source of risk. Therefore, liquidity risk in securities is difficult to diversify and contributes to the systemic market risk. This study aims to analyze the relationship between securities returns and liquidity risk while taking into account the time-varying characteristics of illiquidity on the Colombo Stock Exchange from 2015-2019 and taking into account the effect of liquidity level, using the Generalized Method of Movements (GMM) framework model to assess the persistence of illiquidity securities contributions of the updated version of the Amihud illiquidity (Amihud, 1986) proxy to represent across time market illiquidity and to research the time-series relationship between liquidity and returns. The pricing of liquidity risk and its implications for expected returns are empirically tested using the conditional liquidity adjusted capital asset pricing model (LCAPM), where stock returns are cross-sectionally dependent on market risk and three additional betas (β1, β2 , β3 ) that capture different aspects of illiquidity and its risk. The findings reveal some support for the conditional capital asset pricing model (CAPM), but results are not robust to alternative specifications and estimation techniques. The total effect of liquidity risk is 0.11%, and illiquidity is 2.5% per year. Illiquidity premium depends on the expected transaction cost at the end of the holding period for investors' 2.5%. This makes the overall illiquidity premium of 2.61%. These estimates and the overall importance of liquidity level and liquidity risk depend on the model implied restrictions of a constant market risk premium and a fixed transaction cost. However, LCAPM has constructed conditionally; it can relax these model-implied constraints and estimate different liquidity risk premiums while also allowing transaction costs to be a free parameter. The overall liquidity risk characterized by liquidity betas with a single market risk premium is relatively small and barely significant in the restricted model. Using this unrestricted model, find that the overall illiquidity premium corresponds to 2.61%. The empirical results shed light on these channels' toal and relative economic significance and provide evidence of flight to liquidity. Keywords: Capital Asset Pricing Model, Liquidity Risk, Liquidity beta, Generalize Method of Movement, Sri Lanka

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Amihud, Yakov, and Shai Levi. "The Effect of Stock Liquidity on the Firm’s Investment and Production." Review of Financial Studies, June 13, 2022. http://dx.doi.org/10.1093/rfs/hhac036.

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Abstract We propose that stock market liquidity affects corporate investment and production. Illiquidity, which raises firms’ cost of capital, lowers investment in capital assets, R&D, and inventory. This effect holds after we control for endogeneity using exogenous liquidity events, the 2001 decimalization, and the 1997 Nasdaq reform and after employing instrumental variable estimation. Illiquidity affects investment regardless of firms’ financial constraints. Consequently, illiquidity induces firms to adopt less capital-intensive production processes. Illiquid firms have higher marginal productivity of capital, greater labor input increases for given increases in assets, and lower operating leverage, which means lower reliance on fixed costs.

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Ghaidarov, Stillian. "The Cost of Illiquidity for Private Equity Investments." SSRN Electronic Journal, 2009. http://dx.doi.org/10.2139/ssrn.1525666.

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37

Ortiz-Molina, Hernan, and Gordon M. Phillips. "Real Asset Illiquidity and the Cost of Capital." SSRN Electronic Journal, 2011. http://dx.doi.org/10.2139/ssrn.1413780.

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38

Stereńczak, Szymon. "Illiquidity and stock returns: the moderating role of investors' holding period in Central and Eastern European markets." International Journal of Emerging Markets, October 28, 2022. http://dx.doi.org/10.1108/ijoem-01-2022-0125.

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PurposeThe positive illiquidity–return relationship (so-called liquidity premium) is a well-established pattern in international developed stock markets. The magnitude of liquidity premium should increase with market illiquidity. Existing studies, however, do not confirm this conjecture with regard to frontier markets. This may result from applying different approaches to the investors' holding period. The paper aims to identify the role of the holding period in shaping the illiquidity–return relationship in emerging and frontier stock markets, which are arguably considered illiquid.Design/methodology/approachThe authors utilise the data on stocks listed on fourteen exchanges in Central and Eastern Europe. The authors regress stock returns on liquidity measures variously transformed to reflect the clientele effect in a liquidity–return relationship.FindingsThe authors show that the investors' holding period moderates the illiquidity–return relationship in CEE markets and also show that the liquidity premium in these markets is statistically and economically relevant.Practical implicationsThe findings may be of great interest to investors, companies and regulators. Investors and companies should take liquidity into account when making decisions; regulators should employ liquidity-enhancing actions to decrease companies' cost of capital and expand firms' investment opportunities, which will improve growth perspectives for the entire economy.Originality/valueThese findings enrich the understanding of the role that the investors' holding period plays in the illiquidity–return relationship in CEE markets. To the best knowledge, this is the first study which investigates the effect of holding period on liquidity premium in emerging and frontier markets.

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Roch, Alexandre, and Halil Mete Soner. "Resilient Price Impact of Trading and the Cost of Illiquidity." SSRN Electronic Journal, 2011. http://dx.doi.org/10.2139/ssrn.1923840.

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Goyal, Amit, Avanidhar Subrahmanyam, and Bhaskaran Swaminathan. "Illiquidity and the Cost of Equity Capital: Evidence from Actual Estimates of Capital Cost." SSRN Electronic Journal, 2021. http://dx.doi.org/10.2139/ssrn.3905830.

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41

Chipunza, Kudakwashe J., and Kerry McCullough. "The impact of internationalisation on stock liquidity and volatility: Evidence from the Johannesburg Stock Exchange." Journal of Economic and Financial Sciences 11, no. 1 (April 9, 2018). http://dx.doi.org/10.4102/jef.v11i1.161.

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Maximising firm value remains a key tenet of corporate managers. Firms with lower illiquidity and volatility attract lower risk premiums, and these are associated with a lower cost of capital and higher firm value. Internationalisation is one avenue purported to provide liquidity and volatility benefits – possibly lowering both liquidity and volatility risk premiums. This study investigated whether South African domiciled stocks experience a surge in liquidity and/or decline in volatility subsequent to internationalisation. The findings show that internationalisation resulted in a surge in liquidity, and this increase was persistent as suggested by the trading volume and Amihud illiquidity measures of stock liquidity; however, the turnover measure indicated that such liquidity gains were temporary. Similarly, volatility declines after internationalisation were temporary. There was inconclusive evidence to show that internationalised stocks had higher liquidity relative to purely domestic shares, and no statistically significant difference between the volatility of internationalised and purely domestic shareholders’ equity was noted. There is only weak evidence to support internationalisation as a route for lowering cost of capital via a reduction in the liquidity risk premium.

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42

Ghaidarov, Stillian. "Arbitrage-Free Analytical Bound on the Cost of Illiquidity in Equity Markets." SSRN Electronic Journal, 2010. http://dx.doi.org/10.2139/ssrn.2127425.

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Dimmock, Stephen G., Neng Wang, and Jinqiang Yang. "The Endowment Model and Modern Portfolio Theory." Management Science, April 28, 2023. http://dx.doi.org/10.1287/mnsc.2023.4759.

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We develop a dynamic portfolio choice model with illiquid alternative assets to analyze the “endowment model,” widely adopted by institutional investors, such as pension funds, university endowments, and sovereign wealth funds. In the model, the alternative asset has a lockup but can be liquidated at any time by paying a proportional cost. We model how investors can engage in liquidity diversification by investing in multiple illiquid alternative assets with staggered lockup expirations and show that doing so increases alternatives allocations and investor welfare. We show how illiquidity from lockups interacts with illiquidity from secondary market transaction costs resulting in endogenous and time-varying rebalancing boundaries. We extend the model to allow crisis states and show that increased illiquidity during crises causes holdings to deviate significantly from target allocations. This paper was accepted by Bruno Biais, finance. Funding: S. G. Dimmock gratefully acknowledges financial support from the Singapore Ministry of Education [Grant R-315-000-133-133]. N. Wang gratefully acknowledges support from CKGSB Research Institute. J. Yang gratefully acknowledges the support from the National Natural Science Foundation of China [Grants 71772112, 71972122, and 72072108], Innovative Research Team of Shanghai University of Finance and Economics [Grant 2016110241], and Shuguang Program of Shanghai Education Development Foundation and Shanghai Municipal Education Commission. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2023.4759 .

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Goyal, Amit, Avanidhar Subrahmanyam, and Bhaskaran Swaminathan. "Illiquidity and the cost of equity capital: Evidence from actual estimates of capital cost for U.S. data." Review of Financial Economics, July 6, 2023. http://dx.doi.org/10.1002/rfe.1179.

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Blanc-Blocquel, Augusto, Luis Ortiz-Gracia, and Rodolfo Oviedo. "Hedging At-the-money Digital Options Near Maturity." Methodology and Computing in Applied Probability 25, no. 1 (February 10, 2023). http://dx.doi.org/10.1007/s11009-023-10013-6.

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AbstractHedging at-the-money digital options near maturity, remains a challenge in quantitative finance. In the present work, we carry out a hedging strategy by means of a bull spread. We study the probability of super- and sub-hedge the digital option and minimize the probability of a sub-hedge considering the cost of hedging and illiquidity issues. We perform a wide variety of numerical experiments under different models for the underlying asset dynamics. A calibration to market data is provided and used to get the optimal composition of the bull spread satisfying the cost of hedging restriction.

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Chen, Jiayuan, and Cal B. Muckley. "Does Stock Market Illiquidity Influence the Cost of Borrowing? Evidence from Syndicated Loans." SSRN Electronic Journal, 2016. http://dx.doi.org/10.2139/ssrn.2887049.

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Pani, Victor, Ricardo Leal, and Raphael Moses Roquete. "DO MULTIFACTOR MODELS CONTRIBUTE TO ESTIMATE THE COST OF EQUITY CAPITAL IN BRAZIL?" BASE - Revista de Administração e Contabilidade da Unisinos 20, no. 2 (August 28, 2023). http://dx.doi.org/10.4013/base.2023.202.03.

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This study investigates the contribution of well-known multifactor asset pricing models to estimate the cost of equity capital of Brazilian listed companies with the Capital Asset Pricing Model (CAPM), the three-factor model of Fama and French (1993), the Carhart (1997) four-factor model and a five-factor model that consists of an additional illiquidity risk factor. The sample are the returns of individual stocks comprising a portfolio of companies in the IBrX 100 stock index from July 2008 to June 2018. Distributions of individual company cost of equity capital estimates obtained with each model were compared among themselves in the full sample period and two sub-periods. The results suggest that adding extra risk factors to the CAPM does not always translate into different cost of equity capital estimates and significantly greater explanatory power. The practical implication is that the CAPM estimates may often be the same as those obtained by means of more complex models with the added bonus of the CAPM's simplicity.

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Bradford, C. Steven. "Regulating Investment Crowdfunding: Small Business Capital Formation and Investor Protection." Zeitschrift für Bankrecht und Bankwirtschaft 27, no. 6 (January 15, 2015). http://dx.doi.org/10.15375/zbb-2015-0603.

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AbstractInvestment crowdfunding is a promising solution to the difficulties that small businesses, especially startups, have raising capital. But the capital formation gains promised by crowdfunding come at a cost. Crowdfunding exposes investors, including small, unsophisticated investors who may not appreciate the potential problems, to serious risks of fraud, entrepreneurial self-dealing, illiquidity, and business failure.Regulation may help protect investors, but there’s an unavoidable tradeoff between investor protection and the cost of raising capital through crowdfunding. Excessive regulation will kill crowdfunding by making it too expensive for the small offerings it is meant to facilitate. But excessive investor losses will also kill crowdfunding; if crowdfunding becomes a haven for fraud, the pool of potential investors will dry up.Crowdfunding regulation has a number of possible focal points: the issuers of the securities being sold; the intermediaries through whom those securities are sold; the investors buying the securities. And various types of regulation are possible, including disclosure requirements, investor sophistication requirements, investment limits, due diligence requirements, and resale limitations. This article considers the regulatory choices the United States and Germany have made and discusses how crowdfunding should be regulated.

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"Toward Greater Transparency and Efficiency in Trading Fixed-Income ETF Portfolios." Journal of Trading, November 1, 2018. http://dx.doi.org/10.3905/jot.2018.13.4.062.

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The over-the-counter global corporate bond market, characterized by opacity and illiquidity, is undergoing a rapid transformation driven by new regulations and technology. Bond exchange-traded funds (ETFs) offer one vision of the possible future of the market, trading on organized exchanges with typically narrow spreads and high liquidity. The success of bond ETFs relies critically on the efficient functioning of arbitrage. In recent years, improved real-time technology combined with greater post-trade transparency (e.g., through TRACE) has made it possible to generate intraday estimates for a fixed-income portfolio based on individual bond data and macro-market parameters. In this article, the authors describe one possible approach to developing and implementing such an intraday estimate. From a practical perspective, they illustrate how investors and traders can use these estimates as a complement to existing data (such as end-of-day NAV) to better understand the underlying bond portfolio value during the trading day and for transaction cost analysis. More generally, the article illustrates the potential for new analytics to increase transparency and further accelerate the ongoing evolution of fixed-income markets.

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Tauseef, Sana, and Philippe Dupuy. "Pakistan: a study of market's returns and anomalies." Journal of Economics, Finance and Administrative Science, March 15, 2022. http://dx.doi.org/10.1108/jefas-06-2021-0098.

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Purpose This paper aims to expand foreign investors' understanding of potential return enhancement and risk diversification advantages offered by equity market of Pakistan through comparing its performance to performances in other markets and investigating what matters for investing in Pakistan's market.Design/methodology/approachComparative analysis of Pakistan Stock Exchange is performed using data for 22 developed and 22 emerging markets over the period 1993–2019. Cross-sectional analysis is performed using data for 130 non-financial firms from Pakistan and Carhart (1997) and Fama and French (2015) models are applied. The role of liquidity with five-factor model is analyzed using turnover rate and Amihud (2002) illiquidity cost as liquidity measures.FindingsPakistan's equity offers substantial diversification benefits if added to developed market portfolios. However, observed large returns come together with inverted premia for most traditional factors indicating that investors may want to invest preferably in big stocks with low book-to-market and momentum. Finally, global investors can invest in high yielding stocks with low liquidity risk owing to positive connection between liquidity and returns.Practical implicationsThis study will provide investment model for foreign investors to enhance their portfolio returns. Policy makers in Pakistan must identify regulatory steps to facilitate foreign investments.Originality/valueTo the best of the authors' knowledge, this is the first study which identifies efficiency gains offered by Pakistan's equity for global investors.

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Journal articles on the topic 'Illiquidity cost'

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