Funding Liquidity, Market Liquidity and the Cross-Section of Stock Returns

Jean-Sebastien Fontaine, René Garcia and Sermin Gungor

Abstract: Following theory, we check that funding risk connects illiquidity, volatility and returns in the cross-section of stocks. We show that the illiquidity and volatility of stocks increase with funding shocks, while contemporaneous returns decrease with funding shocks. The dispersions of illiquidity, volatility and returns widen following funding shocks. Funding risk is priced, generating a returns spread of 4.25 percent (annually) between the most and least illiquid portfolios, and of 5.30 percent between the most and least volatile portfolios. Estimates are robust using mimicking portfolio returns, alternative portfolio sorts, traditional test assets, other risk factors, monthly returns or quarterly returns.

Keywords: Funding risk; Stock returns; Limits to arbitrage; Market liquidity; Volatility (search for similar items in EconPapers)
JEL-codes: E43 H12 (search for similar items in EconPapers)
Date: 2016-04-25
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cirano.qc.ca/files/publications/2016s-21.pdf

Related works:
Working Paper: Funding Liquidity, Market Liquidity and the Cross-Section of Stock Returns (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2016s-21

Access Statistics for this paper

More papers in CIRANO Working Papers from CIRANO Contact information at EDIRC.
Bibliographic data for series maintained by Webmaster ().