Posts Tagged ‘liquidity


Gráfico du Jour: Liquidez de Bancos Europeos

(Fuente ESIEB Research, via Zero Hedge)


Paper: Keynes, deuda y trampa de liquidez

Debt, Deleveraging, and the Liquidity Trap

In this paper we present a simple New Keynesian-style model of debt-driven slumps – that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption: Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.

Link al Paper


Paper: HFT y su impacto

High Frequency Trading and its Impact on Market Quality

This paper examines the impact of high frequency traders (HFTs) on equities markets. I analyze a unique data set to study the strategies utilized by HFTs, their profitability, and their relationship with characteristics of the overall market, including liquidity, price efficiency, and volatility. I find that in my sample HFTs participate in 77% of all trades and that they tend to engage in a price-reversal strategy. I find no evidence suggesting HFTs withdraw from markets in bad times or that they engage in abnormal front-running of large non-HFTs trades. The 26 high frequency trading (HFT) firms in the sample earn approximately $3 billion in profits annually. HFTs demand liquidity for 50.4% of all trades and supply liquidity for 51.4% of all trades. HFTs tend to demand liquidity in smaller amounts, and trades before and after a HFT demanded trade occur more quickly than other trades. HFTs provide the inside quotes approximately 50% of the time. In addition if HFTs were not part of the market, the average trade of 100 shares would result in a price movement of $.013 more than it currently does, while a trade of 1000 shares would cause the price to move an additional $.056. HFTs are an integral part of the price discovery process and price efficiency. Utilizing a variety of measures introduced by Hasbrouck (1991a, 1991b, 1995), I show that HFTs trades and quotes contribute more to price discovery than do non-HFTs activity. Finally, HFT reduces volatility. By constructing a hypothetical alternative price path that removes HFTs from the market, I show that the volatility of stocks is roughly unchanged when HFT initiated trades are eliminated and significantly higher when all types of HFT trades are removed.

Link al Paper


CoCos, ¿una alternativa?

Vox tiene un articulo sobre las ventajas y desventajas coditional covertibles, aka CoCos. Es interesante como el autor ilumina el panorama cuando los posiciona dentro de la estructura de incentivos de una empresa.

The CoCo suggestion is that equity holders will be incentivised to issue new additional equity early, in order to protect themselves against being wiped out by dilution, and from any manipulation to activate the trigger by CoCo holders hoping to benefit. Indeed, some of the proponents hope that the incentives to raise new issues in good times will be such as to make banks continuously well capitalised and to prevent CoCos being triggered except very rarely (and by the miscalculation of existing equity holders).


Paper: Commodities y Liquidez

Liquidity Commonality in Commodities

Commodities have become an important asset class. However there has been little focus on commodities in the literature as compared to stocks and bonds. We show, using data from 16 agricultural, energy, industrial metal, precious metal, and livestock commodities, that there is a strong systematic liquidity factor (liquidity commonality) in commodities. This existed at the start of our sample period in 1997 but has become stronger over time. We also find that systematic liquidity risk is an important determinant of commodity returns. Finally, there is no consistent relation between changes in systematic stock market liquidity and changes in systematic commodity liquidity.

Link al Paper


Paper: Trades, Inversores e información

To Trade or Not to Trade? Informed Trading with High-Frequency Signals for Long-Term Investors

When a long-term investor trades a slowly changing portfolio, she is not very time sensitive to when exactly she should place or change her bet. The value of the embedded optionality provided by this flexibility may be extracted by using high frequency information to choose when to trade (exercise the option). Mechanically, if the short-term view concurs with the trade, then the trade is placed. Otherwise, the investor waits for a more favorable environment. Strategic trade modification provides exposure to short-term signals without having to pay additional transaction costs and with no capacity limits. We implement our trading approach (Informed Trading) on real and simulated portfolios to illustrate its effect on portfolio performance. We show that realistic portfolios can achieve a five percent exposure to a high frequency signal. Long-term investors should no longer ignore high frequency information just because it is too expensive to trade on.

Link al Paper


¿Iliquidez paga?

David Merkel tiene un breve e interesante post sobre iliquidez, el cual comienza con un juego de palabras: no todo puede ser liquido; no todo deberia ser liquido; no todo sera liquido. Lo valioso es el relato de su experiencia:


Now, when I was a bond manager, because my client had a large amount of long noncallable liabilities, I bought less liquid debts when I received adequate compensation to do so, but not more than my client’s balance sheet could tolerate.  That allowed me to make better money for my client, but without increasing risk.  Hey, use the advantages that you have.

But remember, even if you understand the illiquid security perfectly well, but you don’t understand your own liquidity situation, you might find yourself in a situation where you have to sell, but few others understand the security, and no good bids are offered.


Phrasing it differently: we only hold illiquid assets, or illiquid amounts of assets when we know a lot more than the market. We have paid the barrier to entry, and are the heavy hitter now.  We make money off of superior knowledge, though illiquidity means that trades will be infrequent.

Fun & Finance


Fun & Finance Rollover

"It is hard to be finite upon an infinite subject, and all subjects are infinite." Herman Melville

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