Liquidity Risk and the Dynamics of Arbitrage Capital

We develop a continuous‐time model of liquidity provision in which hedgers can trade multiple risky assets with arbitrageurs. Arbitrageurs have constant relative risk‐aversion (CRRA) utility, while hedgers' asset demand is independent of wealth. An increase in hedgers' risk aversion can make arbitrageurs endogenously more risk‐averse. Because arbitrageurs generate endogenous risk, an increase in their wealth or a reduction in their CRRA coefficient can raise risk premia despite Sharpe ratios declining. Arbitrageur wealth is a priced risk factor because assets held by arbitrageurs offer high expected returns but suffer the most when wealth drops. Aggregate illiquidity, which declines in wealth, captures that factor.     

Crises,Liquidity Shocks,and Fire Sales at Commercial Banks

If liquidity shortages cause financial crises, a lender of last resort can provide funds to banks facing potential fire sales. However, if funding problems primarily occur at banks with existing solvency problems, then government liquidity programs may not spur bank lending. We find that commercial bank funding does not typically dry up in a crisis, not even during the subprime crisis. Rather, weak banks are more likely to borrow less. Furthermore, banks rely more on deposits and newly issued equity than fire sales. When they do sell assets, they cherry pick assets in order to alleviate pressure from capital regulations.     

Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach

This paper examines the determinants of the time it takes foran index options market to return to no arbitrage values afterput-call parity deviations, using intraday transactions datafrom the French index options market. We employ survival analysisto characterize how limits to arbitrage influence the expectedduration of arbitrage deviations. After controlling for conventionallimits to arbitrage, we show that liquidity-linked variablesare associated with a faster reversion of arbitrage profits.The introduction of an Exchange Traded Fund also affects thesurvival rates of deviations, but this impact essentially stemsfrom the reduction in the level of potential arbitrage profits.     

The Role of Information Precision in Determining the Cost of Equity Capital

We examine the association between the cost of equity capital and the quality of public and private information. We find an inverse relationship between the cost of capital and the precision of public information, but the effect is more than offset by a positive relationship between the cost of equity capital and the precision of private information. Public and private information precisions are positively correlated, and a model that fails to include both is vulnerable to a correlated omitted variable bias. The association between public and private information combined with their opposing effects on the cost of capital implies mangers should consider the relationship between public and private information when assessing their reporting strategy.     

The Behavior of an Institutional Investor with Arbitrage Opportunities and Liquidity Risk

This study analyzes the efficiency of liquidity flows in stabilizing distressed markets from a theoretical perspective. We show that even in the event of a major negative market shock, a financial institution can increase its investment in the market when there is a strong incentive for arbitrage profit. However, the institution may choose to reduce its investment if the fear from liquidity risk exceeds the arbitrage incentive. In addition, our model reveals a positive relationship between funding liquidity and market liquidity. Our findings help to explain several financial issues in distressed markets, including the flight to quality, liquidity dry-ups, asset fire sales, and market shock amplifications.     

商业银行监管资本套利的均衡分析

监管资本套利,产生于巴塞尔协议资本监管框架的缺陷,是一种利用资本监管制度之间的差异性以及制度内部的不协调性,运用某种手段在不改变实际风险水平的情况下提高资本充足率水平的行为。通过对以下问题的探讨:商业银行监管资本套利所获得的收益在银行与资金需求方之间的配置比例;针对某种资产的监管资本套利,对其他资产供求双方所产生的隐性套利收益的表现形式及其归属程度;由商业银行异质性所导致的监管套利顾客现象;信息不对称情况下,市场对于套利者与非套利者的逆向选择等等,认为银行监管部门应适当引导符合政策意图的套利行为,提高政策引导调控能力。     

The Role of Internal Capital Markets in Financial Intermediaries: Evidence From Insurer Groups

We exploit the transparency of internal capital markets (ICMs) within insurance groups to investigate the activity and efficiency of ICMs within insurance groups. Specifically, we compare the relationship between internal capital transfers and investment to that between capital from other sources and investment. The ability to track the actual ICM transactions allows for more direct analysis of ICM activity than most previous studies. Consistent with theory, we find evidence that ICMs play a significant role in the investment behavior of affiliated insurers. We then use these detailed data to execute a more direct test of ICM efficiency than currently exists in the literature. Consistent with ICM efficiency, results suggest that capital is allocated to subsidiaries with the best expected performance.     

Firm Internationalization and Capital Structure in Developing Countries: The Role of Financial Development

We investigate the relationship between internationalization and the level of debt financing for more than 18,000 firm/year observations from thirty-one developing countries in the period 1991-2006. We argue that this relationship can be affected by both country-level and firm-level factors. The results show that in developing countries with relatively higher financial development, firm internationalization corresponds with a greater level of debt when firms have more growth opportunities (which also indicate a higher level of asymmetric information). This evidence suggests that relatively developed financial markets in developing countries at least partially mitigate the effect of asymmetric information and decrease the agency cost of debt for firms with higher levels of internationalization.     

财务报告内部控制:一个悖论

从历史发展、实践考察和理论逻辑等三个视角来看,财务报告内部控制面临着两难困境。从历史发展看,围绕资产保护展开的一桩历史公案表明,财务报告内部控制无法离开资产保护而单独存在。但若广义理解资产保护,就须定位为内部控制;而狭义理解资产保护,会导致人为割裂经营活动与财务报告之间的关系。从实践考察看,无论是横向分离还是纵向分离,都无法从内部控制系统中分离出一个所谓的财务报告内部控制系统。从理论逻辑看,财务报告内部控制是审计和监管当局自我界定责任范围的一个权宜之计。总之,财务报告内部控制研究陷入了一个为不能独立存在的系统寻找独立存在的理由的尴尬境地。因此,应该尽早用"内部控制"取代"财务报告内部控制"。     

股票流动性对公司资本结构的影响研究

本文分析了流动性对公司资本结构的影响。理论分析表明,一个公司股权交易流动性的提高,使得公司股权融资成本得以降低,公司更倾向于采用增发、配股等股权融资的方式融资,这会降低公司的财务杠杆率。同时,借鉴资本结构动态调整的思想分析,发现个股流动性越高,资本结构的调整速度越快。本文基于2002—2010沪深两市发行的非金融业A股数据,采用面板数据回归等方法研究了股票流动性等因素对公司资本结构的影响,本文的经验结果支持这一理论假设。     

贷款证券化、监管资本套利与资本监管改进

巴塞尔协议的资本充足率指标可以反映银行部门吸收风险损失的能力,但是无法监测和控制银行体系外的贷款总额和累积的信用风险。20世纪70年代的贷款证券化创新导致银行进行监管资本套利,并使得资本充足率监管趋于失效。本文基于贷款证券化下银行贷款余额与社会贷款余额的差异,分析银行监管资本套利的微观机制并提出改进资本监管的建议。     

Discussion of “The Role of Information Precision in Determining Cost of Equity Capital”

Botosan, Plumlee, and Xie (this issue) demonstrate an association between a proxy for cost of capital and proxies for public and private information precision. These proxies have limitations that suggest caution in interpreting their results, absent evidence of proxy validity. The proxy for cost of capital is based on Value Line's beliefs about expected returns, not actual expected returns. The proxy for private information measures information revealed by analysts, not information used by inside traders. In this paper, Botosan, Plumlee, and Xie (this issue; hereafter BPX) empirically explore the joint effect that public and private information precision have on the cost of equity capital. Their key findings are that more precise public information lowers the cost of capital, while more precise private information raises the cost of capital. The paper considers whether public and private information are substitutes or complements but finds no evidence of an interactive effect. This is an important question with significant policy implications for firms, investors, and regulators. While there is (as the authors discuss) considerable prior literature on the topic, the matter is empirically unsettled, so further evidence is welcome. Also, the authors make an important point that, given the correlation between public and private information, it is essential to control for one when analyzing the effect of the other. The reliability of the results in BPX depends on whether the proxies used in the paper effectively measure the underlying economic constructs. Cost of equity capital is proxied by a formula using Value Line forecasts, while public and private information measures are based on analyst forecast dispersion and accuracy. Most of the following discussion considers how reliable these proxies might be.     

Arbitrage,Liquidity, and the Valuation of Exchange Traded Funds

This paper investigates the performance of U.S. and country exchange traded funds currently traded in the United States and provides new insight into their pricing. While the U.S. funds are priced closely to their net asset values, the country funds are not and can exhibit large, positive autocorrelations in fund premium. The mispricing of country funds is related to momentum, illiquidity, and size effects. We also find an inverted U‐shaped relationship between fund premium and market liquidity, which suggests that more active trading does lead to lower mispricing but only after a certain level of liquidity is reached.     

Bank Capital and Liquidity Creation: Granger-Causality Evidence

We examine the relation between capital and liquidity creation. This issue is interesting because of the potential impact on liquidity creation from tighter capital requirements such as those in Basel III. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive data set of Czech banks, which mainly includes small banks from 2000 to 2010. We observe a strong expansion in liquidity creation until the financial crisis that was mainly driven by large banks. We show that capital negatively Granger-causes liquidity creation in this industry, where majority of banks are small. But we also observe that liquidity creation Granger-causes a reduction in capital. These findings support the view that Basel III can reduce liquidity creation, but also that greater liquidity creation can reduce banks’ solvency. Thus, we show that this reverse causality generates a trade-off between the benefits of financial stability induced by stronger capital requirements and the benefits of increased liquidity creation.     

Fire Sales in a Model of Complexity

We present a model of financial crises that stem from endogenous complexity. We conceptualize complexity as banks' uncertainty about the financial network of cross exposures. As conditions deteriorate, cross exposures generate the possibility of a domino effect of bankruptcies. As this happens, banks face an increasingly complex environment since they need to understand a greater fraction of the financial network to assess their own financial health. Complexity dramatically amplifies banks' perceived counterparty risk, and makes relatively healthy banks reluctant to buy risky assets. The model also features a novel complexity externality.