International Illiquidity

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.

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

JEL Classification: G11, G12, G15

Suggested Citation: Suggested Citation

Malkhozov, Aytek and Mueller, Philippe and Vedolin, Andrea and Venter, Gyuri, International Illiquidity (2017-03). FRB International Finance Discussion Paper No. 1201, Available at SSRN: https://ssrn.com/abstract=2940138 or http://dx.doi.org/10.17016/IFDP.2017.1201