Author
V. Ravi Anshuman
Other affiliations: Indian Institute of Management Ahmedabad
Bio: V. Ravi Anshuman is an academic researcher from Indian Institute of Management Bangalore. The author has contributed to research in topics: Market liquidity & Cash flow. The author has an hindex of 6, co-authored 17 publications receiving 976 citations. Previous affiliations of V. Ravi Anshuman include Indian Institute of Management Ahmedabad.
Topics: Market liquidity, Cash flow, Market maker, Liquidity crisis, Tick size
Papers
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TL;DR: In this article, the authors analyzed the relationship between expected equity returns and the level as well as the volatility of trading activity, a proxy for liquidity, and found that the second moment of liquidity should be positively related to asset returns, provided agents care about the risk associated with fluctuations in liquidity.
712 citations
TL;DR: In this paper, the optimal tick size that maximizes the expected profits of the market maker can be found to be equal to $1/8 for reasonable parameter values, and the optimal size is decreasing in the degree of adverse selection.
Abstract: Exchange-mandated discrete pricing restrictions create a wedge between the underlying equilibrium price and the observed price. This wedge permits a competitive market maker to realize economic profits that could help recoup fixed costs. The optimal tick size that maximizes the expected profits of the market maker can be equal to $1/8 for reasonable parameter values. The optimal tick size is decreasing in the degree of adverse selection. Discreteness per se can cause time-varying bid-ask spreads, asymmetric commissions, and market breakdowns. Discreteness, which imposes additional transaction costs, reduces the value of private information. Liquidity traders can benefit under certain conditions. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
109 citations
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TL;DR: In this paper, a negative cross-sectional relationship between stock returns and the variability of dollar trading volume and share turnover was found. But the relationship between expected equity returns and volatility of trading activity was not analyzed.
Abstract: We analyze the relation between expected equity returns and the level as well as the volatility of trading activity. We document a negative cross-sectional relationship between stock returns and the variability of dollar trading volume and share turnover, after controlling for size, book-to-market, momentum, and the level of dollar volume or share turnover. This effect survives a number of robustness checks and is statistically and economically significant. Our analysis highlights the importance of trading activity related variables in the cross-section of expected stock returns.
105 citations
TL;DR: In this article, the authors present a market microstructure model of stock splits in the presence of minimum tick size rules, where discretionary trading is endogenously determined and there exists a tradeoff between adverse selection costs on the one hand and discreteness related costs and opportunity costs of monitoring the market.
58 citations
TL;DR: In this paper, the authors argue that corporate executives should consider some changes to account for the political risk associated with making investments in emerging economies by structuring project cash flows in ways that better align the incentives of the project sponsor and the government of the host country.
Abstract: In theory, political risk is project-specific and should be accounted for in the estimation of the expected investment cash flows. But in practice, the political risk associated with this type of investment is typically accounted for implicitly by adjusting the investment's required rate of return or the discount rate. As the authors discuss in the article, this approach disguises the specific assumptions being made about the risk of expropriation and so makes it difficult to assess this risk properly.
While defending some aspects of current practice, the authors argue that corporate executives should consider some changes. For example, although a project analysis that is shared with the host government could incorporate a risk adjustment to the discount rate, the authors suggest that more explicit analysis of the anticipated risk of expropriation should be incorporated into the analysis of expected project cash flows. This analysis could involve making specific assumptions about the “term structure” of expropriation risk over the life of the investment.
Finally, the authors note that the political risk of making investments in emerging economies can be managed to some extent. Investments can be structured in ways that reduce political risk by structuring project cash flows in ways that better align the incentives of the project sponsor and the government of the host country.
12 citations
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TL;DR: In this article, the authors show that expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock ex ante excess return partly represents an illiquid price premium, which complements the cross-sectional positive return-illiquidity relationship.
5,636 citations
TL;DR: In this paper, the effects of stock illiquidity on stock return have been investigated and it was shown that expected market illiquidities positively affects ex ante stock excess return (usually called risk premium) over time.
Abstract: New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure here is the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.
5,333 citations
TL;DR: In this article, the authors investigated whether marketwide liquidity is a state variable important for asset pricing and found that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity.
Abstract: This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. From 1966 through 1999, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5 percent annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Furthermore, a liquidity risk factor accounts for half of the profits to a momentum strategy over the same 34-year period.
4,048 citations
01 Jan 2012
TL;DR: In this paper, the effects of stock illiquidity on stock return have been investigated and it was shown that expected market illiquidities positively affects ex ante stock excess return (usually called risk premium) over time.
Abstract: New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure here is the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.
2,465 citations
TL;DR: In this paper, a simple equilibrium model with liquidity risk is proposed, where a security's required return depends on its expected liquidity as well as on the covariances of its own return and liquidity with the market return.
2,020 citations