Abstract

https://ssrn.com/abstract=2557211
 


 



Funding Risk, Market Liquidity, Market Volatility and the Cross-Section of Asset Returns


Jean-Sebastien Fontaine


Bank of Canada

René Garcia


Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Sermin Gungor


Bank of Canada

October 1, 2016


Abstract:     
We find strong evidence of a funding risk premium in the cross-section of asset returns. Our estimate for the price of funding risk is robust across Treasury bonds, corporate bonds, equities, and hedge funds. Funding shocks pose a risk to investors because they exacerbate the illiquidity and volatility of securities, increase the dispersions of asset illiquidity and volatility, and decrease contemporaneous returns. Our price-of-risk estimates are also robust to using mimicking portfolio returns, alternative portfolio sorts, traditional test assets, monthly returns or quarterly returns. Funding shocks are not subsumed by common proxies for market-wide illiquidity or dealers' balance sheet risk.

Number of Pages in PDF File: 55

Keywords: Funding risk, Stock returns, Limits to arbitrage, Market liquidity, Volatility

JEL Classification: E43, H12


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Date posted: January 30, 2015 ; Last revised: October 29, 2016

Suggested Citation

Fontaine, Jean-Sebastien and Garcia, René and Gungor, Sermin, Funding Risk, Market Liquidity, Market Volatility and the Cross-Section of Asset Returns (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=2557211

Contact Information

Jean-Sebastien Fontaine (Contact Author)
Bank of Canada ( email )
234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
HOME PAGE: http://www.jean-sebastienfontaine.com
René Garcia
Université de Montréal - CIREQ - Département de sciences économiques ( email )
C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)
University of Montreal ( email )
United States
Sermin Gungor
Bank of Canada ( email )
234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
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