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Liquidity and international bond pricing
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Panyanukul, Sakkapop (2010) Liquidity and international bond pricing. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b2491645~S15
Abstract
This thesis focuses on the liquidity risk and its impact on bond prices of the
international markets and comprises three self-contained research papers.
In the first research paper, we examine the role of the liquidity in the pricing of
sovereign U.S. dollar bonds in emerging markets. We extend Acharya and Pedersen’s
(2005) liquidity-adjusted capital asset pricing model to the bond market and find that
both liquidity level and multiple liquidity risks are priced factors for the expected excess
return of U.S. dollar bonds issued by developing countries. The combined effects of
liquidity risk and liquidity level can explain as much as 1% per annum extra yield
spread for the countries that have higher liquidity betas. Countries, which have a high
correlation with the global market or U.S. stock market, have higher required bond
returns than low correlation countries. The liquidity factor helps explain the credit
spread puzzle of high yields. Our empirical results also support a flight to liquidity
across the studied countries and are robust after controlling for bond characteristics and
the U.S. risk factors.
The second research paper finds that both liquidity level and liquidity risk are important
in explaining the cross-section of domestic government bond returns in 39 countries
(both emerging and developed) around the world. After controlling for other market
factors and bond characteristics, liquidity level and liquidity risk together can explain as
much as 0.41% per annum of extra yield for the highest versus the lowest liquidity risk
countries, which are China and Argentina respectively. There is also an evidence of
liquidity spillovers from the U.S. equity market to domestic bond markets around the
world. Employing a conditional model, which allows both time-series and crosssectional
variations in liquidity betas, we find that the impact of liquidity risk is time
varying across two different regimes: it increases in times of high uncertainty and is
always larger in emerging than in developed countries. Nevertheless, the price of risk or
premium required by investors for holding this time-varying risk is relatively modest.
The third research paper examines whether liquidity spillovers between sovereign bonds
are systematic or idiosyncratic in character. A theoretical model is developed, which
demonstrates that idiosyncratic spillovers require returns to be correlated, whereas
systematic spillovers require volatilities to be correlated. We apply the model to
sovereign bonds in 35 emerging markets, aggregated for some analyses into Asian,
European and Latin American regions. We find liquidity spillovers mainly from Latin
America to the other regions and they are both systematic and idiosyncratic in character.
Further cross-sectional analysis (by country) and time-series analysis (by region) show
that systematic spillovers are more important than idiosyncratic spillovers. The
conclusion is that most liquidity risk across emerging bond markets is systematic and
therefore cannot easily be hedged away. This has important implications for portfolio
selection by fund managers and for the regulation of systemic risk.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||
Library of Congress Subject Headings (LCSH): | International liquidity, Bonds -- Prices, International finance | ||||
Official Date: | September 2010 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Gemmill, Gordon T. | ||||
Sponsors: | Thanākhān hǣng Prathēt Thai [Bank of Thailand] | ||||
Extent: | xi, 206 leaves : ill., charts | ||||
Language: | eng |
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