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International IlliquidityAytek MalkhozovBoard of Governors of the Federal Reserve System Philippe MuellerLondon School of Economics & Political Science (LSE) - Department of Finance Andrea VedolinLondon School of Economics and Political Science Gyuri VenterCopenhagen Business School April 1, 2016 Abstract: We build a parsimonious international asset pricing model in which deviations of government bond yields from a fitted yield curve of a country measure the tightness of investors' capital constraints. We compute these measures at daily frequency for six major markets and use them to test the model-predicted effect of funding conditions on asset prices internationally. Global illiquidity lowers the slope and increases the intercept of the international security market line. Local illiquidity helps explain the variation in alphas, Sharpe ratios, and the performance of betting-against-beta (BAB) strategies across countries.
Number of Pages in PDF File: 58 Keywords: Liquidity, Market Frictions, Capital Constraints, International CAPM JEL Classification: G12, G15 Date posted: April 6, 2014 ; Last revised: August 6, 2016Suggested CitationContact Information
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