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Journal articles on the topic 'Illiquidity discount'

Author: Grafiati

Published: 4 June 2021

Last updated: 12 February 2022

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1

Bagna, Emanuel. "The Liquidity Discount in the Italian Market." International Business Research 13, no. 11 (October 27, 2020): 137. http://dx.doi.org/10.5539/ibr.v13n11p137.

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The illiquidity discount represents the reduction in the value of an asset because it cannot be easily sold. It is usually applied by appraisals in valuing a minority interest in a closely-held business. This article presents a literature review of the illiquidity discount and an analysis of the level of discount in Italy during the period 2003 - 2012. The analysis conducted made it possible to verify: a) the existence for the Italian market of a discount for lack of liquidity for shares with less turnover; b) the variability over time of that discount, thus agreeing with the literature that has found the premiums for liquidity risk vary over time. The discounts that were found are, nonetheless, smaller than those indicated in the literature. The descending trend over time for the discount would seem to be particularly consistent with the studies on restricted stocks.

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2

Kümmerle, Ruth, and Markus Rudolf. "The Illiquidity Discount of Life Insurance Investments." Zeitschrift für die gesamte Versicherungswissenschaft 105, no. 3 (August 2016): 255–87. http://dx.doi.org/10.1007/s12297-016-0343-0.

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3

Asem, Ebenezer, Jessica Chung, Xin Cui, and Gloria Y. Tian. "Liquidity, investor sentiment and price discount of SEOs in Australia." International Journal of Managerial Finance 12, no. 1 (February 1, 2016): 25–51. http://dx.doi.org/10.1108/ijmf-10-2013-0106.

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Purpose – The purpose of this paper is to empirically test whether stock liquidity and investor sentiment have interactive effects on seasoned equity offers (SEOs) price discounts in Australia. Design/methodology/approach – The authors focus on the implicit cost borne by firms when issuing seasoned equity capital. This cost is measured as the relative difference between the SEO offer price and the last close price prior to the announcement of the issue. The primary measure of investor sentiment is a composite index constructed similar to that in Baker and Wurgler (2007). Findings – The results show that, in periods of deteriorating investor sentiment, the increase in SEO price discounts for firms with illiquid stocks is larger than the corresponding increase for firms with liquid stocks. This suggests that, as sentiment wanes, investors become even more concerned about illiquidity, leading to even greater required compensation for holding illiquid assets. The authors find that information asymmetry is positively related to SEO price discounts but this relation is not affected by changing investor sentiment. Research limitations/implications – Collectively, the empirical results provide support for the argument that price discount of SEOs represents compensation to investors for bearing costs associated with illiquidity. The results also lend some support to the behavioural argument that pricing of equity offers is dependent upon investor sentiment, particularly for firms with illiquid stocks. Practical implications – The ability for firms to raise capital in a cost-effective manner is critical for firm growth and stability. Investors require compensation for bearing the costs of illiquidity of their investments in equity. Accordingly, firms need to be conscious of their stocks’ existing liquidity and its influence on the cost of raising additional capital which, in turn, affects their operational stability and investment opportunities. Social implications – Ultimately, the implications of this study will assist firms in capital-raising decisions, investors in making portfolio investment decisions, and investment banks in setting offer prices on equity issues. Originality/value – To the best of the authors’ knowledge, this is the first study to examine the interaction between investor sentiment and SEO price discounts in Australia.

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4

Azher, Sara, and Javed Iqbal. "Testing Conditional Asset Pricing in Pakistan: The Role of Value-at-risk and Illiquidity Factors." Journal of Emerging Market Finance 17, no. 2_suppl (June 21, 2018): S259—S281. http://dx.doi.org/10.1177/0972652718777124.

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This article investigates performance of conditional and unconditional Capital Asset Pricing Model and Fama–French model augmented with a downside risk, that is, the value-at-risk (VaR) factor and an illiquidity factor as additional risk factors using the discount factor methodology of Cochrane (1996). Using monthly portfolio data as test assets from the Pakistani stock market from January 1993 to January 2013 we provide empirical evidence on the efficacy of the VaR and illiquidity factors in asset pricing. We find that these factors improve the efficacy of the Fama–French model and including these factors reduces the explanatory power of co-kurtosis factor.

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5

ROCH, ALEXANDRE, and H. METE SONER. "RESILIENT PRICE IMPACT OF TRADING AND THE COST OF ILLIQUIDITY." International Journal of Theoretical and Applied Finance 16, no. 06 (September 2013): 1350037. http://dx.doi.org/10.1142/s0219024913500374.

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We construct a model for liquidity risk and price impacts in a limit order book setting with depth, resilience and tightness. We derive a wealth equation and a characterization of illiquidity costs. We show that we can separate liquidity costs due to depth and resilience from those related to tightness, and obtain a reduced model in which proportional costs due to the bid-ask spread is removed. From this, we obtain conditions under which the model is arbitrage free. By considering the standard utility maximization problem, this also allows us to obtain a stochastic discount factor and an asset pricing formula which is consistent with empirical findings (e.g., Brennan and Subrahmanyam (1996); Amihud and Mendelson (1986)). Furthermore, we show that in limiting cases for some parameters of the model, we derive many existing liquidity models present in the arbitrage pricing literature, including Çetin et al. (2004) and Rogers and Singh (2010). This offers a classification of different types of liquidity costs in terms of the depth and resilience of prices.

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6

Comment, Robert. "Revisiting the Illiquidity Discount for Private Companies: A New (and “Skeptical”) Restricted-Stock Study." Journal of Applied Corporate Finance 24, no. 1 (March 2012): 80–91. http://dx.doi.org/10.1111/j.1745-6622.2012.00368.x.

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7

Davies, Richard, Mary Fletcher, and Andrew Marshall. "Investigating the role of illiquidity in explaining the UK closed-end country fund discount." International Review of Financial Analysis 30 (December 2013): 121–30. http://dx.doi.org/10.1016/j.irfa.2013.07.014.

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8

Maurer, Thomas A., Thuy-Duong Tô, and Ngoc-Khanh Tran. "Pricing Risks Across Currency Denominations." Management Science 65, no. 12 (December 2019): 5308–36. http://dx.doi.org/10.1287/mnsc.2018.3109.

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We use principal component analysis on 55 bilateral exchange rates of 11 developed currencies to identify two important global risk sources in foreign exchange (FX) markets. The risk sources are related to Carry and Dollar but are not spanned by these factors. We estimate the market prices associated with the two risk sources in the cross-section of FX market returns and construct FX market-implied country-specific stochastic discount factors (SDFs). The SDF volatilities are related to interest rates and expected carry trade returns in the cross-section. The SDFs price international stock returns and are related to important financial stress indicators and macroeconomic fundamentals. The first principal risk is associated with the Treasury-EuroDollar (TED) spread, quantities measuring volatility, tail and contagion risks, and future economic growth. It earns a relatively small implied Sharpe ratio. The second principal risk is associated with the default and term spreads and quantities capturing volatility and illiquidity risks. It further correlates with future changes in the long-term interest rate and earns a large implied Sharpe ratio. This paper was accepted by Lauren Cohen, finance.

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9

van Loon, Paul R. F., Andrew J. G. Cairns, Alexander J. McNeil, and Alex Veys. "Modelling the liquidity premium on corporate bonds." Annals of Actuarial Science 9, no. 2 (February 16, 2015): 264–89. http://dx.doi.org/10.1017/s1748499514000347.

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AbstractThe liquidity premium on corporate bonds has been high on the agenda of Solvency regulators owing to its potential relationship to an additional discount factor on long-dated insurance liabilities. We analyse components of the credit spread as a function of standard bond characteristics during 2003–2014 on a daily basis by regression analyses, after introducing a new liquidity proxy. We derive daily distributions of illiquidity contributions to the credit spread at the individual bond level and find that liquidity premia were close to zero just before the financial crisis. We observe the time-varying nature of liquidity premia as well as a widening in the daily distribution in the years after the credit crunch. We find evidence to support higher liquidity premia, on average, on bonds of lower credit quality. The evolution of model parameters is economically intuitive and brings additional insight into investors’ behaviour. The frequent and bond-level estimation of liquidity premia, combined with few data restrictions makes the approach suitable for ALM modelling, especially when future work is directed towards arriving at forward-looking estimates at both the aggregate and bond-specific level.

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10

Buchner, Axel. "Equilibrium liquidity premia of private equity funds." Journal of Risk Finance 17, no. 1 (January 18, 2016): 110–28. http://dx.doi.org/10.1108/jrf-07-2015-0068.

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Purpose – The purpose of this paper is to propose a novel theory of the equilibrium liquidity premia of private equity funds and explore its asset-pricing implications. Design/methodology/approach – The theory assumes that investors are exposed to the risk of facing surprise liquidity shocks, which upon arrival force them to liquidate their positions on the secondary private equity markets at some stochastic discount to the fund’s current net asset value. Assuming a competitive market where fund managers capture all rents from managing the funds and investors just break even on their positions, liquidity premia are defined as the risk-adjusted excess returns that fund managers must generate to compensate investors for the costs of illiquidity. The model is calibrated to data of buyout funds and is illustrated by using numerical simulations. Findings – The model analysis generates a rich set of novel implications. These concern how fund characteristics affect liquidity premia, the role of the investors’ propensities of liquidity shocks in determining liquidity premia and the impact of market conditions and cycles on liquidity premia. Originality/value – This is the first paper that derives liquidity premia of private equity funds in an equilibrium setting in which investors are exposed to the risk of facing surprise liquidity shocks.

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11

Hou, Wenxuan, and Sydney Howell. "Trading constraints and illiquidity discounts." European Journal of Finance 18, no. 1 (January 2012): 1–27. http://dx.doi.org/10.1080/1351847x.2011.574972.

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12

Herdegen, Martin, Johannes Muhle-Karbe, and Dylan Possamaï. "Equilibrium asset pricing with transaction costs." Finance and Stochastics 25, no. 2 (March 3, 2021): 231–75. http://dx.doi.org/10.1007/s00780-021-00449-4.

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AbstractWe study risk-sharing economies where heterogeneous agents trade subject to quadratic transaction costs. The corresponding equilibrium asset prices and trading strategies are characterised by a system of nonlinear, fully coupled forward–backward stochastic differential equations. We show that a unique solution exists provided that the agents’ preferences are sufficiently similar. In a benchmark specification with linear state dynamics, the empirically observed illiquidity discounts and liquidity premia correspond to a positive relationship between transaction costs and volatility.

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13

Silber, William L. "Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices." Financial Analysts Journal 47, no. 4 (July 1991): 60–64. http://dx.doi.org/10.2469/faj.v47.n4.60.

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14

Chen, Linda H., Edward A. Dyl, George J. Jiang, and Januj A. Juneja. "Risk, illiquidity or marketability: What matters for the discounts on private equity placements?" Journal of Banking & Finance 57 (August 2015): 41–50. http://dx.doi.org/10.1016/j.jbankfin.2015.03.009.

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15

Kramer, Charles, and R. Todd Smith. "The Mexican Crisis and the Behavior of Country-Fund Discounts: Renewing the Puzzle of Closed-End Fund Pricing." International Journal of Theoretical and Applied Finance 01, no. 01 (January 1998): 161–74. http://dx.doi.org/10.1142/s0219024998000084.

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Many studies have attempted to reconcile the behavior of closed-end fund prices with notions about the behavior of investors. Such studies have appealed to frictions (taxes, agency costs, and illiquidity) and investor sentiment to explain the puzzling behavior of fund prices. The events of December 1994 in Mexico, and subsequent effects on some funds' prices, have given rise to a new puzzle, extreme premia on closed-end funds that invest in Mexican stocks. We believe this new puzzle is not amenable to explanation by extant hypotheses. We offer a hypothesis of loss-aversion on the part of individual investors as a possible explanation, and outline the relevant effects that loss-aversion should have on fund discounts.

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16

Inget, Rahsan Bozkurt. "Private Equity Placements and Illiquidity Discount." SSRN Electronic Journal, 2009. http://dx.doi.org/10.2139/ssrn.1583562.

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17

KKmmerle, Ruth, and Markus Rudolf. "The Illiquidity Discount of Life Insurance Investments." SSRN Electronic Journal, 2016. http://dx.doi.org/10.2139/ssrn.2742293.

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18

Damodaran, Aswath. "Marketability and Value: Measuring the Illiquidity Discount." SSRN Electronic Journal, 2005. http://dx.doi.org/10.2139/ssrn.841484.

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19

Baz, Jamil, Steve Sapra, Christian Stracke, and Wentao Zhao. "Valuing a Lost Opportunity: An Alternative Perspective on the Illiquidity Discount." Journal of Portfolio Management, December 18, 2020, jpm.2020.1.197. http://dx.doi.org/10.3905/jpm.2020.1.197.

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20

Abad, David, Belen Nieto, Roberto Pascual Gascó, and Gonzalo Rubio. "Market-Wide Illiquidity and the Volatility of a Model-Free Stochastic Discount Factor." SSRN Electronic Journal, 2020. http://dx.doi.org/10.2139/ssrn.3601732.

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21

Davies, J. R. Richard (Dick), Mary Fletcher, and Andrew P. Marshall. "Investigating the Role of Illiquidity in Explaining the UK Closed-End Country Fund Discount." SSRN Electronic Journal, 2012. http://dx.doi.org/10.2139/ssrn.2084121.

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22

Comment, Robert. "Revisiting the Illiquidity Discount for Private Companies: A New (and Skeptical) Restricted-Stock Study." SSRN Electronic Journal, 2011. http://dx.doi.org/10.2139/ssrn.1884486.

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23

O’Brien, Christopher D. "Actuarial valuations to monitor defined benefit pension funding." British Actuarial Journal 25 (2020). http://dx.doi.org/10.1017/s1357321720000173.

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Abstract This paper is motivated by The Pensions Regulator (TPR)’s review of its Code of Practice on funding for defined benefit schemes and aims to suggest how trustees and regulators should monitor the extent to which scheme assets are adequate to cover liabilities. It concludes that current practice is inadequate and needs to change. A review is carried out of papers on not only this subject but also (to collect ideas rather than automatically apply them to pensions solvency valuations) pensions and insurance accounting and regulation. Current practice is “scheme-specific funding” which permits discretion on choice of discount rates and other assumptions; the paper is concerned that this can lead to bias, and that trends in a scheme’s solvency can be obscured by changing assumptions. This also leads to the funding ratio communicated to scheme members having little meaning. The paper suggests that regulators should require a valuation that is based on sound principles, objective, fair, neutral, transparent and feasible. A prescribed methodology would replace discretion. It concludes that the benefits to be valued are those arising on discontinuance of the scheme, without allowing for future salary-related benefit increases, which are felt to no longer be a constructive obligation of employers. The valuation should, it is suggested, use market values of assets, which is largely current practice. Liabilities should reflect the trustees fulfilling their liabilities, rather than transferring them to an insurer (which may introduce artificialities). The discount rate should follow the “matching” approach, being a market-consistent risk-free rate: this is consistent with several papers to the profession in recent years. It avoids the problems of the “budgeting” approach, where the discount rate is based on the expected return on assets – this can be used to help set contribution levels but is not suitable for determining the value of liabilities, which depends on salary, service, longevity, etc and (very largely) not on the assets held. In principle, the liability value can be adjusted for illiquidity. Credit risk of the employer should not be allowed for. Liabilities should reflect the (probability-weighted) expected value of future cash flows and should not be increased by prudent margins or risk margins (which would lead to a non-neutral figure). Risk disclosures are needed to understand and manage risks. The resulting funding ratio is a consistent measure, to be disclosed to members, which can be used to manage the scheme, and by regulators as the basis for requiring action. Scheme-specific management using data such as the employer covenant means that immediate action to ensure 100% solvency on the proposed basis would not necessarily be appropriate. The author encourages the profession to advise TPR on the above lines.

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24

Hou, Wenxuan, and Sydney Howell. "Trading Constraints and Illiquidity Discounts." SSRN Electronic Journal, 2008. http://dx.doi.org/10.2139/ssrn.984764.

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25

Albuquerque, Rui A., and Enrique J. Schroth. "Blockholder Illiquidity, Marketability Discounts, and Stock Price Discounts." SSRN Electronic Journal, 2009. http://dx.doi.org/10.2139/ssrn.1444821.

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26

Jain, Ravi, Yihong Xia (deceased), and Matthew Qianli Wu. "Illiquidity and Closed-End Country Fund Discounts." SSRN Electronic Journal, 2004. http://dx.doi.org/10.2139/ssrn.562504.

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27

Ghaidarov, Stillian. "Illiquidity Discounts for Equity Securities with Perpetual Trading Restrictions." SSRN Electronic Journal, 2018. http://dx.doi.org/10.2139/ssrn.3240887.

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