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A Market-Based Funding Liquidity Measure

Author

Listed:
  • Zhuo Chen
  • Andrea Lu

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 margins, to control for their sensitivity to the aggregate funding shocks. Our measure of funding liquidity 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 our funding liquidity measure has superior pricing performance for various portfolios. Despite evident comovement, this measure contains additional information that is not subsumed by market liquidity.Received March 29, 2017; accepted August 8, 2018 by Editor Wayne Ferson.

Suggested Citation

  • Zhuo Chen & Andrea Lu, 2019. "A Market-Based Funding Liquidity Measure," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 9(2), pages 356-393.
    • Handle: RePEc:oup:rasset:v:9:y:2019:i:2:p:356-393.
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    File URL: http://hdl.handle.net/10.1093/rapstu/ray007
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    Citations

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    Cited by:

    1. Shiyang Huang & Xin Liu & Dong Lou & Christopher Polk, 2024. "The Booms and Busts of Beta Arbitrage," Management Science, INFORMS, vol. 70(8), pages 5367-5385, August.
    2. Bradrania, Reza & Veron, Jose Francisco, 2023. "The beta anomaly in the Australian stock market and the lottery demand," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    3. Leszek Borowiec & Marzena Kacprzak & Agnieszka Król, 2023. "Information Value of Individual and Consolidated Financial Statements for Indicative Liquidity Assessment of Polish Energy Groups in 2018–2021," Energies, MDPI, vol. 16(9), pages 1-16, April.
    4. González-Urteaga, Ana & Rubio, Gonzalo, 2021. "The quality premium with leverage and liquidity constraints," International Review of Financial Analysis, Elsevier, vol. 75(C).
    5. Chen, Yong & Da, Zhi & Huang, Dayong, 2022. "Short selling efficiency," Journal of Financial Economics, Elsevier, vol. 145(2), pages 387-408.
    6. Sehgal, Sanjay & Rakhyani, Sarika & Deisting, Florent, 2022. "Does betting against beta strategy work in major Asian Markets?," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    7. Feng, Frank Yulin & Kang, Wenjin & Zhang, Huiping, 2023. "Liquidity shocks and the negative premium of liquidity volatility around the world," Journal of International Money and Finance, Elsevier, vol. 139(C).

    More about this item

    Keywords

    G10; G11; G23;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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