Noise as Information for Illiquidity
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Pan_Noise as.pdf
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Author(s)
Hu, Grace Xing
Pan, Jun
Wang, Jiang
Date Issued
December 2013
Journal
Journal of Finance
Publisher
John Wiley & Sons, Inc
Citation
Hu, Grace Xing, Jun Pan, and Jiang Wang. “Noise as Information for Illiquidity.” The Journal of Finance 68, no. 6 (December 2013): 2341–2382.
Version
Author's final manuscript
Abstract
We propose a market-wide liquidity measure by exploiting the connection between the amount of arbitrage capital in the market and observed “noise” in U.S. Treasury bonds—the shortage of arbitrage capital allows yields to deviate more freely from the curve, resulting in more noise in prices. Our noise measure captures episodes of liquidity crises of different origins across the financial market, providing information beyond existing liquidity proxies. Moreover, as a priced risk factor, it helps to explain cross-sectional returns on hedge funds and currency carry trades, both known to be sensitive to the general liquidity conditions of the market.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1111/jofi.12083
