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Flight to Liquidity and Global Equity Returns

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  • Goyenko, Ruslan
  • Sarkissian, Sergei

Abstract

Investment practice and academic literature suggest a great degree of interaction between the world’s stock markets and most liquid and safe assets, such as U.S. Treasuries. Using data from 46 markets and a 30-year time period, we examine the impact of “flight-to-liquidity” events on global asset valuation. This wide cross-sectional and time-series sample provides a natural setting for analyzing the link between changes in the illiquidity of Treasuries and expected equity returns. Our illiquidity measure is the average percentage bid-ask spread of off-the-run U.S. Treasury bills with maturities of up to one year. We find that this proxy predicts stock market illiquidity and future equity returns in both developed and emerging markets. This predictive relation remains intact after controlling for various world and country-level variables. Asset pricing tests further reveal that Treasury bond illiquidity is a significantly priced factor even in the presence of other conventional risks, such as those of the world stock market, foreign exchange, local equity market variance and illiquidity, as well as the term spread. Our results indicate that flight-to-liquidity risk is an important determinant of returns in global equity markets.

Suggested Citation

  • Goyenko, Ruslan & Sarkissian, Sergei, 2010. "Flight to Liquidity and Global Equity Returns," MPRA Paper 27546, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27546
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    Cited by:

    1. Gann, Philipp, 2009. "Liquidität, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgestützte Analyse," Discussion Papers in Business Administration 10582, University of Munich, Munich School of Management.
    2. Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2009. "The information content of market liquidity: An empirical analysis of liquidity at the Oslo Stock Exchange?," Working Paper 2009/26, Norges Bank.
    3. Gianni De Nicolò & Iryna Ivaschenko, 2009. "Global Liquidity, Risk Premiums and Growth Opportunities," CESifo Working Paper Series 2598, CESifo Group Munich.
    4. Lieven Baele, 2010. "The Determinants of Stock and Bond Return Comovements," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2374-2428, June.
    5. Gianni De Nicolo & Iryna V. Ivaschenko, 2009. "Global Liquidity, Risk Premiums and Growth Opportunities," IMF Working Papers 09/52, International Monetary Fund.
    6. Lieven Baele & Geert Bekaert & Koen Inghelbrecht, 2007. "The determinants of stock and bond return comovements," Working Paper Research 119, National Bank of Belgium.
    7. Alquist, Ron, 2010. "How important is liquidity risk for sovereign bond risk premia? Evidence from the London stock exchange," Journal of International Economics, Elsevier, pages 219-229.

    More about this item

    Keywords

    Cross-asset integration; Flight-to-quality; Illiquidity beta; International asset pricing; Monetary policy;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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