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International Finance

Paper Session

Sunday, Jan. 6, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, Grand Ballroom C
Hosted By: American Finance Association
  • Chair: Allaudeen Hameed, National University of Singapore

Is Liquidity Risk Priced in Partially Segmented Markets?

Ines Chaieb
,
University of Geneva and Swiss Finance Institute
Vihang Errunza
,
McGill University
Hugues Langlois
,
HEC Paris

Abstract

We analyze the joint impact of liquidity costs and market segmentation on asset pricing. The freely traded securities command a global market and liquidity risk premiums whereas the securities that can be held by only a subset of investors command additionally a conditional local market and liquidity risk premiums. We find that the liquidity level is the biggest contributor to liquidity premia for the 24 emerging markets we examine. The second contributor is the global market liquidity risk premium which dramatically increases during crises and market corrections. Even though conditional local risk is significantly priced for most markets, conditional local liquidity risk premium is empirically small. Our results shed light on the channels through which liquidity affects asset prices in partially segmented markets and how this pricing relation changes over time. We also provide a new methodology for estimating the diversification portfolios used to measure unspanned local risk.

The Real Value of China's Stock Market

Jennifer Carpenter
,
New York University
Fangzhou Lu
,
Massachusetts Institute of Technology
Robert Whitelaw
,
New York University

Abstract

This paper shows that, counter to common perception, stock prices in China are strongly linked to firm fundamentals. Since the reforms of the early 2000s, stock prices are as informative about future profits as they are in the US. Although the market is segmented from international equity markets, Chinese investors price individual stock characteristics like other global investors: they pay up for size, growth, liquidity, and long shots, while they discount for systematic risk. Price informativeness is significantly correlated with corporate investment efficiency. For international investors, China's stock market offers high average returns and low correlation with other equity markets.

Nowhere to Run, Nowhere to Hide: Asset Diversification in a Flat World

John Cotter
,
University College Dublin
Stuart Gabriel
,
University of California-Los Angeles
Richard Roll
,
California Institute of Technology

Abstract

This paper presents new indexes of investment diversification potential within and among country equity, sovereign debt, and real estate asset classes. The diversification indexes derive from estimates of asset return integration based on common global factors. The indexes reveal a marked and near ubiquitous decline in diversification potential across asset classes and markets for the post-2000 period. The reduction in diversification opportunity is associated with sharply higher levels of investment risk. Analysis of panel data suggests that declines in diversification potential are associated with country economic development and internet diffusion. Diversification also waned during the 1992 ERM and 2009-2010 European sovereign debt crises. The findings are robust to macro-financial and market liquidity influences and to proxies for economic, political, and financial risk. The results offer a cautionary note regarding asset class and geographic diversification of investment risk in an increasingly flat world.
Discussant(s)
Christian Lundblad
,
University of North Carolina
Zhiguo He
,
University of Chicago
Jeffrey Wurgler
,
New York University
JEL Classifications
  • G1 - General Financial Markets