A Market-Based Funding Liquidity Measure

60 Pages Posted: 24 Jan 2014 Last revised: 8 May 2018

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University; Tsinghua University - PBC School of Finance

Andrea Lu

The University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Date Written: May 5, 2018

Abstract

We construct a traded funding liquidity measure from stock returns. Guided by a model, we extract the measure as the return spread between two beta-neutral portfolios constructed using stocks with high and low margin, to control for stocks' sensitivities to the aggregate funding shocks. Our measure is correlated with other funding liquidity proxies. It delivers a positive risk premium that cannot be explained by existing risk factors. A model augmented by the proposed funding liquidity factor has superior pricing performance for various portfolios. Despite evident co-movement, this factor contains additional information that is not subsumed by market liquidity movement.

Keywords: Funding Liquidity, Margin Requirements, Traded Risk Factor

JEL Classification: G10, G11, G23

Suggested Citation

Chen, Zhuo and Lu, Andrea Y., A Market-Based Funding Liquidity Measure (May 5, 2018). PBCSF-NIFR Research Paper No. 14-01. Available at SSRN: https://ssrn.com/abstract=2383457 or http://dx.doi.org/10.2139/ssrn.2383457

Zhuo Chen (Contact Author)

Tsinghua University ( email )

43 Chengfu Road
Beijing, 100083
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Andrea Y. Lu

The University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
Parkville, Victoria 3010 3010
Australia
+61383443326 (Phone)
+61383446914 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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