Abstract

http://ssrn.com/abstract=1573164
 
 

References (86)



 
 

Citations (22)



 


 



Evaporating Liquidity


Stefan Nagel


University of Michigan, Stephen M. Ross School of Business; University of Michigan Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research

October 1, 2010

AFA 2011 Denver Meetings Paper

Abstract:     
The returns of short-term reversal strategies in equity markets can be interpreted as a proxy for the returns from liquidity provision. Analysis of reversal strategies shows that the expected return from liquidity provision is strongly time-varying and highly predictable with the VIX index. Expected returns and conditional Sharpe Ratios increase enormously along with the VIX during times of financial market turmoil, such as the financial crisis 2007-09. Even reversal strategies formed from industry portfolios (which do not yield high returns unconditionally) produce high rates of return and high Sharpe Ratios during times of high VIX. The results point to withdrawal of liquidity supply, and an associated increase in the expected returns from liquidity provision, as a main driver behind the evaporation of liquidity during times of financial market turmoil, consistent with theories of liquidity provision by financially constrained intermediaries.

Number of Pages in PDF File: 49

Keywords: Liquidity, Immediacy, Reversal Strategies, VIX, Financial Crisis

JEL Classification: G12, G01

working papers series


Download This Paper

Date posted: March 22, 2010 ; Last revised: July 23, 2011

Suggested Citation

Nagel, Stefan, Evaporating Liquidity (October 1, 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1573164 or http://dx.doi.org/10.2139/ssrn.1573164

Contact Information

Stefan Nagel (Contact Author)
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
University of Michigan Department of Economics
Lorch Hall
Ann Arbor, MI 48109
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Feedback to SSRN


Paper statistics
Abstract Views: 1,045
Downloads: 219
Download Rank: 72,279
References:  86
Citations:  22

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.219 seconds