International Finance Discussion Papers (IFDP)

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March 2017

International Illiquidity

Aytek Malkhozov, Philippe Mueller, Andrea Vedolin, and Gyuri Venter

Abstract:

We build a parsimonious international asset pricing model in which deviations of government bond yields from a fitted yield curve of a country measure the tightness of investors' capital constraints. We compute these measures at daily frequency for six major markets and use them to test the model-predicted effect of funding conditions on asset prices internationally. Global illiquidity lowers the slope and increases the intercept of the international security market line. Local illiquidity helps explain the variation in alphas, Sharpe ratios, and the performance of betting-against-beta (BAB) strategies across countries.

Keywords: Liquidity, Market Frictions, Capital Constraints, International CAPM

DOI: https://doi.org/10.17016/IFDP.2017.1201

PDF: Full Paper

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Last Update: January 09, 2020