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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
International Illiquidity
Aytek Malkhozov
Philippe Mueller
Andrea Vedolin
Gyuri Venter
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.


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Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, International Illiquidity, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1201, Mar 2017.
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Subject headings:
Keywords: Liquidity ; Market Frictions ; Capital Constraints ; International CAPM
DOI: 10.17016/IFDP.2017.1201
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