Reversals in Global Market Integration and Funding Liquidity
Abstract: This paper looks at the reversals in global financial integration through the funding liquidity lens. First, we construct a segmentation indicator based on differences in funding liquidity across countries as measured by the performance of betting-against-beta strategies. Second, we find that funding liquidity shocks help explain recent reversals in integration in the absence of explicit foreign investment barriers. These findings are consistent with tighter limits to arbitrage and increased home bias during funding distress periods. Our empirical analysis is guided by a margin-CAPM model generalized to an international setting.
Abstract: We test a fully conditional, international, intertemporal asset-pricing model. With a large cross-section of developed and emerging markets, we find support for a constant price of currency risk but not for intertemporal risk. Intertemporal risk is priced only conditionally, when time-variation is introduced. This requires disentangling the two, as both factors are likely proxies of the state variables that affect asset prices over time. The fit of the model is mainly improved by currency risk rather than intertemporal risk. However, a model with residual time-varying intertemporal risk in addition to the other factors statistically outperforms the one with currency risk.
Accepted for presentation in: Financial Management Association International (FMA), Florida, USA 2015; European Finance Association (EFA), Vienna, Austria 2015; International Conference of the French Finance Association (AFFI), Cergy, France 2015; European Financial Management Association (EFMA), Breukelen, Netherlands 2015; Midwest Finance Association (MFA), Chicago, USA 2015
available on SSRN (listed on SSRN's Top Ten download list for: Emerging Markets: Finance eJournal). Previously circulated as "Pricing Together Developed and Emerging Markets with Multiple Risk Factors".
Prices of Risk and the Business Cycle, (with Francesca Carrieri)
Abstract: We estimate in a linear regression framework an asset pricing model that is both intertemporal and fully conditional. Using time-varying quantities of risk as regressors, we focus our analysis on the time-varying prices of risk to capture investors’ assessment of the shift in investment opportunities through the economic cycle. Separately with each information variable, we show that the reward for intertemporal risk is decreasing during recessions with the proxy that negatively predicts market returns. This evidence stands opposite to our findings for the compensation for market risk. When combining all information variables we find that in statistical terms the conditional price for intertemporal risk with this proxy is relatively more significant than the price of market risk at the end of an expansion and during recessions. Thus differences in the two sources of risk are heightened in this phase of the cycle since holding assets with weak or negative correlation with the market becomes crucial especially at these times. The relative importance of intertemporal risk in recessions is also supported by the reduction in the unexplained portion of the asset pricing model for those periods.
Accepted for presentation in: Econometric Society World Congress, Montreal, Canada 2015; European Financial Management Association (EFMA), Breukelen, Netherlands 2015