Beruflich Dokumente
Kultur Dokumente
An Overview
• Practitioners
• Quick introduction to important
aspects and developments
• Students
• Summary of current state of research for
• Researchers
• Starting point for further research
• Those interested
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 2
• Introduction
• Market liquidity
– Definition
– Characteristics
– Measurement
– Empirical facts
• Market liquidity risk
– Introduction
– Models
• Summary and open research questions
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 3
"Credit crisis puts heat on liquidity Liquidity always a hot topic – especially in
Financial market liquidity can take months to build but just crises
seconds to evaporate [...] Credit traders have received a • Liquidity always scarce when needed most
painful reminder of [...] strangled trading liquidity"
Financial Times, 30.07.2007
Institutional investors engage in illiquid
'Panicked Traders Take VW Shares on a Wild Ride - strategies
stock soared to as high as 1,005 euros a share ... after last • Sometimes large, concentrated position to
week at 210 euros.... short sellers were forced to act"
exploit market inefficiencies
NY Times, 28.08.2008 • Returns due to liquidity risk compensation?
'Some less liquid strategies which also provided genuine
portfolio diversification [...] have romped past the S&P Trading strategies rely on tradability of assets
500' • Hedging often requires frequent trading
Michael Goldman, Global Investor, 04/2007
"Unless you include liquidity in your models, which some Risk management still needs to account for
small funds don't, then the model may not always work." illiquidity
Euromoney, June 2007 • Often neglected
'[Quantitative strategies] rely on their ability to trade with • Strong recent pressure from regulators
high frequency […] What if the model is built to sell a
company at 20, but there is no buyer?'
Euromoney, June 2007
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 4
Liquidity
Anomaly
explanation Limits to
arbitrage
Factor in
asset pricing Risk
Asset
management
management
= Causes
= Effect
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 5
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 6
• Introduction
• Market liquidity
– Definition
– Characteristics
– Measurement
– Empirical facts
• Market liquidity risk
– Introduction
– Models
• Summary and open research questions
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 7
=
Direct trading costs • Includes exchange fees, commissions, taxes
• Deterministic
D(q) • Small for institutional investors
+
Price impact costs • Difference between transaction price and mid-price
PIt(q) • Depends on order size q and point of time
+
Delay costs
• Includes search cost, cost due to add. risk during delay
Dt(q)
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 8
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 9
Asset type, order size and horizon are major liquidity determinants
Order • Reasons
size • Heterogeneous opinion
• Delay probability
• Capital restrictions
Liquidation • Costs relative to return are small when held over long period
horizon • Costs are zero for assets held to maturity
• Hence, liquidity is a characteristic of the trading process
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 10
Degree of
illiquidity
liquid illiquid
• All order sizes of the • Order sizes can be • Asset are traded from • No order size of the
asset can be traded at traded at a cost time to time asset is traded
zero costs • Price impact cost • Zero trading days occur • Prohibitive Liquidity costs
important • Delay cost important
• Cash • Limit order book markets • OTC markets of more • Rare art, CDOs?
Ex.
• None, no liquidity • Precise liquidity cost • Liquidity cost and delay • Intrinsic value
issue
Main
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 11
ask price
Bid-ask- mid price
spread area = absolute liquidity costs
bid price
Market depth
Quantity
Quote depth / Size of next-best transacted
Size of best limit orders bid order
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 12
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 13
• Fees
• Quoted bid-ask-spread (Amihud, Mendelson, JFinEco 86)
• Traded bid-ask-spread
• Effective bid-ask-spread (Roll, JoF 84)
Direct • Relation between price change and order flow (Brennan, Subrahmanyam,
measures JFinEco, 96)
• Price response to turnover (Amihud, JFinMar 02)
• Volume related reversal (Pastor, Stambaugh, JPolEco 03)
• Weighted spread by order size (Irvine et. al., working paper 00)
• Depth
• Volume
Indirect • Number of transactions
measures • Turnover rate (Datar et al, JFinMar 98)(1)
• Proportion of zero-trading days (Bekaert et al., WP, 03)
• Turnover-adjusted zero trading days (Liu, JFinEco 06)
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 14
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 15
400
331
TECDAX
300
214
MDAX
200
146
DAX
110
100
52
27
15
0
vol 10 vol 25 vol 50 vol 75 vol 100 vol 150 vol 250 vol 500 vol 750 vol 1000 vol 2000 vol 3000 vol 4000 vol 5000
Volume in k €
Note: Sample = daily data for 160 stocks in four major German stock indices over 5.5 years (II/02-1/08) (not to scale)
Source: Stange, Kaserer (2008a)
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 16
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 17
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 18
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 19
• Introduction
• Market liquidity
– Definition
– Characteristics
– Measurement
– Empirical facts
• Market liquidity risk
– Introduction
– Models
• Summary and open research questions
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 20
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 21
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 22
• However, liquidity costs are substantial and strongly vary between securities
– 25-30 % underestimation of total risk in emerging market currencies (Bangia et
al. 1999)
– Bid-ask-spread component over 50 % of total risk for illiquid stocks (Le Saout
2002)
– 30 % liquidity contribution to intraday risk in small price stocks (Lai 2007)
– Up to 25-30 % liquidity impact on price risk at 10-day horizons (Stange/Kaserer
2008a)
• More than doubles at daily horizons
• Large variance between stocks and position sizes
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 23
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 24
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 25
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 26
Note: "Risk correctly estimated" is determined via standard Kupiec (1995)-statistic; Sample = 160 stocks in four major German stock indices over 5.5 years
Source: Ernst, Stange, Kaserer (2008)
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 27
• Abs. liquidity cost per share ( ) derived from • Integrates price impact of order size
linear regression of transaction prices when
controlling for other risk factor changes (x) – High data requirements
– Liquidity measure highly approximate
• Measurement very noisy
– Assumption of zero price-liquidity correlation
• Independence between price risk and
liquidity impact
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 28
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 29
• Spread model estimated from intraday data • Partially accounts for price impact of order
• Model derived from theoretical ideas on size via increased volume percentile
liquidity drivers
• Traded shares N, degree of info assym. – Unclear if structural model is correct
theta, price elasticity to volume kappa, – Complicated estimation of parameters in
liquidity fixed cost Phi intraday data required
– Possible overestimation because liquidity-
return correlation assumed perfect
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 30
• Price impact curve estimated from best five • Accounts for price impact of order size
limit orders • Price impact more precise because directly
• Available from Paris Bourse measured in limit order book
• Extrapolated for larger sizes
– Only applicable in electronic limit order book
markets
– Time variation of liquidity neglected
– Assumes perfect correlation between liquidity
and price
Liquidity Risk Measurement – Five best limit orders need to be available
– Intraday only
• Normal price risk adjusted for average price – Liquidity cost only extrapolated for medium to
impact large order sizes
• Correction term for difference between – Somewhat arbitrary spread adjustment
average and stock-specific price impact – Provides empirically imprecise results than
other models using limit order data
• See Ernst et al. (2008)
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 31
• Size-specific liquidity cost extracted as • Accounts for price impact of order size in very
weighted spread from limit order book precise way
• Correctly accounts for liquidity-return
correlation
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 32
Precise empirical price impact measurement with limit order book data
8 Stange and Kaserer (2008): Price impact measured with weighted spread
• Size-specific liquidity cost extracted as • Accounts for price impact of order size in very
weighted spread from limit order book precise way
• Correctly accounts for liquidity-return
correlation
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 33
Model overview
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 34
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 35
• Introduction
• Market liquidity
– Definition
– Characteristics
– Measurement
– Empirical facts
• Market liquidity risk
– Introduction
– Models
• Summary and open research questions
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 36
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 37
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 38
Further references
• Bervas (2006) "Market Liquidity and its Incorporation Into Risk Management", Banque de France technical
report, http://www.gloriamundi.org
• Ernst, C., S. Stange. and C. Kaserer (2008a) "Accounting for Non-normality in Liquidity Risk", CEFS
working paper 2008 No. 14, www.cefs.de
• Ernst, C., S. Stange. and C. Kaserer (2008b) "Empirical evaluation of market liquidity risk models", CEFS
working paper 2009 No. 1, www.cefs.de
• Erzegovesi (2002) "VaR and Liquidity Risk. Impact on Market Behaviour and Measurement Issues", Alea
Technical Reports Nr. 14, http://eprints.biblio.unitn.it
• Jorion (2007) "Value at risk: the new benchmark for managing Financial risk", 2. Ed., McGraw-Hill, New
York
• Loebnitz (2006) "Market Liquidity Risk: Elusive no more - Defining and quantifying market liquidity risk",
diploma thesis, University of Twente, http://purl.org/utwente/e582
• Mahadevan, A. (2001) "Incorporating Liquidity Risk in VAR estimation", ICICI Working paper,
http://www.gloriamundi.org
• Stange, S. and C. Kaserer (2008a): "The Impact of Order Size on Stock Liquidity - A Representative
Study", CEFS working paper, www.cefs.de
• Stange, S. and C. Kaserer (2008b) "Why and How to Measure Liquidity Risk", CEFS working paper,
www.cefs.de
• Stange, S. and C. Kaserer (2009) "Market Liquidity Risk – An Overview", CEFS working paper,
www.cefs.de
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 39
Sebastian Stange and Christoph Kaserer, Chair of Financial Management and Capital Markets 40