International Illiquidity

Aytek Malkhozov, Philippe Mueller, Andrea Vedolin, Gyuri Venter

Research output: Working paperResearch

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.
Original languageEnglish
Place of PublicationWashington D.C.
PublisherBoard of Governors of the Federal Reserve System
Number of pages57
Publication statusPublished - Mar 2017
Series International Finance Discussion Papers
Number1201

Keywords

  • Liquidity
  • Market frictions
  • Capital constraints
  • International CAPM

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