The relationship between market liquidity and firm liquidity. Acharya & Pedersen’s Liquidity-adjusted Capital Asset Pricing Model

Inhaltsverzeichnis (Table of Contents)

• 1 Introduction
  • 1.1 Importance, relevance and motivation
  • 1.2 Problem Formulation
    • 1.2.1 Research question
    • 1.2.2 Methodology
  • 1.3 Delimitations
  • 1.4 Structure
• 2 Literature Review
  • 2.1 Pricing of liquidity
  • 2.2 Corporate events that impact liquidity
• 3 The Liquidity-adjusted Capital Asset Pricing Model
  • 3.1 Assumptions
    • 3.1.1 Investors
    • 3.1.2 The market
  • 3.2 Model equilibrium
  • 3.3 Three liquidity risks
  • 3.4 Empirical analysis
    • 3.4.1 Unconditional version
    • 3.4.2 Test process
    • 3.4.3 Illiquidity measure
    • 3.4.4 Portfolio setup
    • 3.4.5 Autocorrelation of market illiquidity
    • 3.4.6 Biases
    • 3.4.7 Liquidity risk findings
  • 3.5 Liquidity risk and asset returns
    • 3.5.1 Estimators
    • 3.5.2 Standard errors
    • 3.5.3 Constrained L-CAPM
  • 3.6 Results
    • 3.6.1 Economic interpretation
    • 3.6.2 Robustness
  • 3.7 Summary
• 4 Liquidity - sources and characteristics
  • 4.1 Market liquidity
    • 4.1.1 General
    • 4.1.2 Sources of illiquidity
  • 4.2 Firm liquidity
    • 4.2.1 General
    • 4.2.2 Corporate events that impact liquidity
  • 4.3 Summary
• 5 Event study
  • 5.1 Methodology
  • 5.2 Research design
    • 5.2.1 Objectives
    • 5.2.2 Event background
    • 5.2.3 Proxy
  • 5.3 Event study setup
    • 5.3.1 Event definition
    • 5.3.2 Selection criteria
    • 5.3.3 Normal and abnormal liquidity
    • 5.3.4 Estimation procedure
    • 5.3.5 Testing procedure
    • 5.3.6 Estimated returns
  • 5.4 Results
    • 5.4.1 ILLIQ results
    • 5.4.2 L-CAPM results
  • 5.5 Robustness tests
    • 5.5.1 ILLIQ robustness tests
    • 5.5.2 L-CAPM robustness tests
  • 5.6 Summary
• 6 Discussion
  • 6.1 Implications for the ILLIQ proxy
  • 6.2 Implications for the L-CAPM
  • 6.3 Economic interpretation of the event study findings
  • 6.4 Limitations

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis aims to investigate the role of firm liquidity in asset pricing and assess the effectiveness of common liquidity measures (like Amihud's illiquidity proxy) and asset pricing models (like the Liquidity-adjusted CAPM) in capturing the impact of time-varying corporate events. The research focuses on understanding how well these existing tools account for dynamic changes in firm liquidity due to specific corporate actions.

• The role of firm liquidity in asset pricing.
• The effectiveness of existing liquidity measures in capturing time-varying corporate events.
• The performance of the Liquidity-adjusted CAPM in accounting for firm liquidity effects.
• The impact of specific corporate events (e.g., share repurchases, debt issuances) on firm liquidity and asset prices.
• Limitations of current models and potential avenues for future research.

Zusammenfassung der Kapitel (Chapter Summaries)

1 Introduction: This chapter introduces the research topic, highlighting the importance of understanding the relationship between firm liquidity, corporate events, and asset pricing. It establishes the research question, outlining the methodology and limitations of the study. The chapter sets the stage for the subsequent investigation into how well established models and measures capture the dynamic nature of liquidity in response to firm-specific events.

2 Literature Review: This chapter reviews existing literature on liquidity pricing and corporate events that impact liquidity. It provides a foundation for the thesis by summarizing previous research on the subject matter, highlighting key findings and setting the context for the original research. This lays the groundwork for understanding the current state of knowledge in the field, identifying gaps, and justifying the need for the present study.

3 The Liquidity-adjusted Capital Asset Pricing Model: This chapter delves into the theoretical framework of the Liquidity-adjusted Capital Asset Pricing Model (L-CAPM), exploring its assumptions, equilibrium conditions, and empirical applications. It examines the model's methodology for incorporating liquidity risk and critically evaluates its ability to capture the time-varying nature of liquidity. The discussion includes a detailed description of the model's empirical analysis and its potential limitations.

4 Liquidity - sources and characteristics: This chapter explores the sources and characteristics of both market liquidity and firm liquidity. It differentiates between the two concepts and analyzes how corporate events can specifically impact firm liquidity. The discussion provides a comprehensive overview of the factors that contribute to liquidity and illiquidity, providing crucial context for the empirical analysis in subsequent chapters.

5 Event study: This chapter details the methodology and design of the event study conducted to investigate the effects of Facebook's share repurchase and McDonald's debt issue on liquidity and asset prices. It explains the selection of events, the choice of liquidity proxies, and the statistical methods used to analyze the data. The chapter meticulously outlines the procedures for identifying and measuring the impacts of these events, providing a transparent and replicable approach to the empirical analysis.

6 Discussion: This chapter discusses the implications of the findings for the chosen illiquidity proxy (ILLIQ) and the L-CAPM model. It provides an economic interpretation of the event study results, highlighting any limitations and suggesting avenues for future research. This section critically evaluates the strength and weaknesses of the methodologies employed, and it proposes directions for future research to address the limitations encountered in the present study.

Schlüsselwörter (Keywords)

liquidity, illiquidity, illiquidity proxies, liquidity risk, market liquidity, firm liquidity, liquidity-adjusted capital asset pricing model, capital asset pricing model, corporate events, event study, asset pricing.

Häufig gestellte Fragen

What is the main goal of this document?

This document serves as a comprehensive language preview for an academic work, encompassing elements such as the table of contents, objectives, key themes, chapter summaries, and a list of keywords.

What is included in the "Inhaltsverzeichnis (Table of Contents)" section?

The "Inhaltsverzeichnis (Table of Contents)" provides a detailed structure of the work, including chapters on the introduction, literature review, Liquidity-adjusted Capital Asset Pricing Model, liquidity sources and characteristics, event study, and a concluding discussion. Each chapter is further broken down into sub-sections, offering a clear roadmap of the content.

What are the "Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)" of the thesis?

The thesis investigates the role of firm liquidity in asset pricing, evaluates the effectiveness of liquidity measures and asset pricing models in capturing the impact of corporate events, and focuses on how well these existing tools account for changes in firm liquidity.

What are some of the key themes explored in the study?

The key themes include the role of firm liquidity in asset pricing, the effectiveness of liquidity measures, the performance of the Liquidity-adjusted CAPM, the impact of corporate events on liquidity, and limitations of current models.

What is the main focus of Chapter 1, "Introduction"?

Chapter 1 introduces the research topic, highlighting the importance of understanding the relationship between firm liquidity, corporate events, and asset pricing. It establishes the research question and outlines the methodology.

What does Chapter 2, "Literature Review," cover?

Chapter 2 reviews existing literature on liquidity pricing and corporate events that impact liquidity, providing a foundation for the thesis by summarizing previous research and setting the context for the original research.

What is the Liquidity-adjusted Capital Asset Pricing Model, as discussed in Chapter 3?

Chapter 3 delves into the theoretical framework of the Liquidity-adjusted Capital Asset Pricing Model (L-CAPM), exploring its assumptions, equilibrium conditions, and empirical applications.

What is covered in Chapter 4, "Liquidity - sources and characteristics"?

Chapter 4 explores the sources and characteristics of both market liquidity and firm liquidity, differentiating between the two concepts and analyzing how corporate events can specifically impact firm liquidity.

What is the focus of the "Event study" described in Chapter 5?

Chapter 5 details the methodology and design of the event study conducted to investigate the effects of corporate events on liquidity and asset prices, explaining the selection of events, the choice of liquidity proxies, and the statistical methods used to analyze the data.

What does Chapter 6, "Discussion," entail?

Chapter 6 discusses the implications of the findings for the chosen illiquidity proxy (ILLIQ) and the L-CAPM model. It provides an economic interpretation of the event study results, highlighting limitations and suggesting avenues for future research.

What are the "Schlüsselwörter (Keywords)" associated with this research?

The keywords include liquidity, illiquidity, illiquidity proxies, liquidity risk, market liquidity, firm liquidity, liquidity-adjusted capital asset pricing model, capital asset pricing model, corporate events, event study, and asset pricing.