Funding Illiquidity, Funding Risk, and Global Stock Returns

60 Pages Posted: 6 Apr 2014 Last revised: 20 Nov 2018

See all articles by Aytek Malkhozov

Aytek Malkhozov

Board of Governors of the Federal Reserve System

Philippe Mueller

Warwick Business School Finance Group

Andrea Vedolin

Boston University - Department of Finance & Economics

Gyuri Venter

Warwick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 13, 2018

Abstract

We test the role of funding-constrained investors across developed financial markets. We compile direct measures of the severity of funding frictions, or illiquidity, from deviations of government bond yields from a fitted yield curve. Using these illiquidity measures, we first show that higher illiquidity is associated with a flatter security market line across markets. Exploiting the cross-section, we find that cross-country variation in illiquidity is associated with cross-country variation in alpha, in line with our theoretical predictions. Finally, we estimate a significant negative illiquidity risk premium that reveals a strong willingness of investors to hedge against the deterioration of funding conditions.

Keywords: Liquidity, Market Frictions, Capital Constraints, International CAPM

JEL Classification: G11, G12, G15, F31

Suggested Citation

Malkhozov, Aytek and Mueller, Philippe and Vedolin, Andrea and Venter, Gyuri, Funding Illiquidity, Funding Risk, and Global Stock Returns (November 13, 2018). Available at SSRN: https://ssrn.com/abstract=2420772 or http://dx.doi.org/10.2139/ssrn.2420772

Aytek Malkhozov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Andrea Vedolin (Contact Author)

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Gyuri Venter

Warwick Business School ( email )

University of Warwick, Gibbet Hill Road
Coventry, CV4 7AL
United Kingdom

HOME PAGE: http://sites.google.com/site/gyuriventer/

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