Abstract

http://ssrn.com/abstract=2019094
 


 



Stock Market Illiquidity, Funding Liquidity, and Bond Risk Premia


Kees E. Bouwman


Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Elvira Sojli


RSM Erasmus University; Duisenberg School of Finance

Wing Wah Tham


Erasmus School of Economics - Econometric Institute

November 11, 2011

Asian Finance Association (AsFA) 2013 Conference
26th Australasian Finance and Banking Conference 2013

Abstract:     
In this paper, we study the link between government bonds and cross-section of stocks. We provide new evidence that links the stock market liquidity to sovereign bond risk premia. We find that the stock market illiquidity variable adds to the well-established Cochrane-Piazzesi and Ludvigson-Ng factors. It explains 10%, 9%, 7%, and 7% of the one-year-ahead variation in the excess return for two-, three-, four-, and five-year bonds respectively and increases the adjusted R2 by 3-6% across all maturities over Cochrane and Piazzesi (2005) and Ludvigson and Ng (2009) factors. The effects are highly statistically and economically significant both in and out of sample. We find that our result is robust to and is not driven by information from open interest in the futures market, long-run inflation expectations, and dispersion in beliefs. We argue that stock market illiquidity is a timely variable that is associated with the state of funding liquidity.

Number of Pages in PDF File: 57

Keywords: Market liquidity, Bond risk premia, Flight-to-quality

JEL Classification: G10, G20, G14

working papers series


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Date posted: March 20, 2012 ; Last revised: December 5, 2013

Suggested Citation

Bouwman, Kees E. and Sojli, Elvira and Tham, Wing Wah, Stock Market Illiquidity, Funding Liquidity, and Bond Risk Premia (November 11, 2011). Asian Finance Association (AsFA) 2013 Conference; 26th Australasian Finance and Banking Conference 2013. Available at SSRN: http://ssrn.com/abstract=2019094 or http://dx.doi.org/10.2139/ssrn.2019094

Contact Information

Kees E. Bouwman
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )
Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands
Elvira Sojli (Contact Author)
RSM Erasmus University ( email )
Finance Department T9-33
Burgemeester Oudlaan 50, PO Box 1738
Rotterdam, 3000DR
Netherlands
0031104082824 (Phone)
HOME PAGE: http://www.rsm.nl/people/elvira-sojli/
Duisenberg School of Finance ( email )
Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands
Wing Wah Tham
Erasmus School of Economics - Econometric Institute ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
HOME PAGE: http://people.few.eur.nl/tham/
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