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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Information and Liquidity in Equity and Bond Markets
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Information and Liquidity in Equity and Bond Markets

Paper Session

Monday, Jan. 4, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: International Banking, Economics, and Finance Association
  • Chair: Eric Fischer, Federal Reserve Bank of New York

Stale Information in the Spotlight: The Effects of Attention Shocks on Equity Markets

Runjing Lu
,
University of Alberta
Chen Siyu
,
Jinan University

Abstract

Media exposure of new information has been shown to facilitate information incorporation into asset prices. But the causal evidence on how asset prices are affected when the media draws investor attention to stale information is still scarce. We exploit exogenous attention shocks generated by the announcements of a financial analyst award -- award winners are featured on the front page of a high-profile financial magazine while analysts just missing the award are not. We find that the award announcement immediately causes higher market reaction to pre-existing stale recommendations from analysts barely winning the award than those by analysts barely missing it. However, the reaction fully reverses in six weeks. Evidence supports the notion that the overreaction is mainly driven by attention trading induced by public exposure of award winners rather than by ability signaling from winning the award. Suggestive evidence further shows that speculative trading based on leaked award information exacerbates the price fluctuation. To understand the longer-term consequences of the announcements, we explore how brokerages and analysts respond in the year after the award. We find that brokerages assign more resources to awardees; the awardees issue more accurate and less biased earnings forecasts, but only for stocks unaffiliated with the brokerages. Our results highlight the temporary price-destabilizing effects of media when it draws investor attention to stale information and the long-lasting effects of public recognition on sell-side research.

Betting Against Other Betas

Scott Murray
,
Georgia State University

Abstract

Using several multifactor models, I find strong "betting against beta" effects - flat relations between betas and expected returns - for most non-market factors in US and international stock markets. "Arbitrage portfolios" designed to profit from these effects earn average returns similar to those of the factors, with substantially reduced risk. Betas are persistent, indicating that the factor models successfully capture important dimensions of covariation in returns. Previously-proposed explanations for the betting against market beta effect do not explain these results. These findings raise questions about the economic content of existing empirical factor models and the covariance-based expected return paradigm.

CDS Market Structure and Bond Spreads

Andrada Bilan
,
Swiss National Bank
Yalin Gunduz
,
Deutsche Bundesbank

Abstract

This paper studies the effects of a supply shock in the liquidity of credit default swap (CDS) markets on bond spreads. Using as a laboratory the universe of CDS transactions done by German banks, our model is identified by the changes in CDS market liquidity due to the exit of a large dealer. We find that the CDS market converges to a new equilibrium, where traded volumes are lower and bid-ask spreads are higher. Bond yields increase in response, with stronger effects for the non-investment-grade class. Individual portfolio data indicate that the effect is partly driven by investors decreasing their holdings of both CDS and related bonds. We, therefore, show that derivative markets can affect demand in underlying securities and, subsequently, the issuers’ cost of capital.

Increasing Corporate Bond Liquidity Premium and Post-Crisis Regulations

Botao Wu
,
New York University

Abstract

I employ corporate bond liquidity premium to understand the important changes in corporate bond market liquidity in the recent periods. I show that while the commonly-used transaction cost measures such as bid-ask spread have been declining, corporate bond liquidity premium has actually increased since the financial crisis. For speculative bonds, over 30% of their yield spread is now compensation for illiquidity. To demonstrate that this increasing liquidity premium is due to dealers being less willing to buy and hold inventory from investors, I show that the liquidity premium is more driven by dealers' inventory costs than search costs, and establish a causal relationship between the major post-crisis regulations and the variations in the corporate bond liquidity premium. I show that Basel II.5 contributed the most to the increasing liquidity premium out of all regulatory changes over the sample period. Finally, I develop an estimation of the latent execution delays implied by the size of the liquidity premium, and show that bonds that took less than one day to sell before the financial crisis now take weeks to trade. This is consistent with practitioners’ description of the post-crisis market situation and further corroborates the relevance of using liquidity premium in understanding corporate bond market liquidity.
Discussant(s)
Anastassia Fedyk
,
University of California-Berkeley
Chen Xue
,
University of Cincinnati
Emil Siriwardane
,
Harvard Business School
Marco Rossi
,
Texas A&M University
JEL Classifications
  • G1 - Asset Markets and Pricing