Reference : Conditional asset allocation: Does Market-Wide Liquidity Matter?
E-prints/Working papers : First made available on ORBi
Business & economic sciences : Finance
http://hdl.handle.net/2268/133990
Conditional asset allocation: Does Market-Wide Liquidity Matter?
English
Bazgour, Tarik mailto [Université de Liège - ULg > HEC-Ecole de gestion de l'ULg : UER > Gestion financière et consolidation >]
Sougné, Danielle mailto [Université de Liège - ULg > HEC-Ecole de gestion de l'ULg : UER > Gestion financière et consolidation >]
Heuchenne, Cédric mailto [Université de Liège - ULg > HEC-Ecole de gestion de l'ULg : UER > Statistique appliquée à la gestion et à l'économie >]
21-Sep-2012
No
[en] Market-Wide Liquidity ; Portfolio choice ; Nonparametric methods
[en] This paper investigates the effect of market-wide liquidity on optimal portfolio allocations across US equity portfolios sorted by size and book-to-market characteristics. In particular, we consider a single-period investor with a relative risk aversion of 5, and use the nonparametric approach of Brandt (1999) to directly express optimal portfolio weights as functions of market-wide liquidity innovations. We find, first, that the effect of market-wide liquidity is a decreasing function of investment horizon. Second, this effect is stronger in allocations in the small stock portfolio and gets weaker as we move towards the large stock portfolio. Third, conditional allocations in risky asset(s) decrease and exhibit shifts towards more liquid and less risky assets as market-wide liquidity worsens. Overall, our results show that allocations based on market-wide liquidity as a signal capture many phenomena that have been identified by researchers in the US market, such as the so-called “flight-to-safety”, flight-to-quality” and “flight-to-liquidity” episodes. Furthermore, in an out-of-sample test, results demonstrate the superior performance of a strategy based on market-wide liquidity compared to a benchmark strategy.
Researchers ; Professionals
http://hdl.handle.net/2268/133990

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