Essays on Liquidity

Author:

Petrasek, Lubomir

Graduate Program:

Business Administration

Degree:

Doctor of Philosophy

Document Type:

Dissertation

Date of Defense:

April 27, 2010

Committee Members:

Quanwei Cao, Dissertation Advisor/Co-Advisor
Quanwei Cao, Committee Chair/Co-Chair
Laura B Field, Committee Member
William Kracaw, Committee Member
Timothy T Simin, Committee Member
N Edward Coulson, Committee Member

Keywords:

international finance
systematic risk
hedge funds
institutional investors
liquidity
corporate bonds

Abstract:

This dissertation contains two essays of liquidity. In the first essay, I analyze the effects of institutional ownership on liquidity risk in the cross-section of stocks. Using a unique, hand-collected data set of hedge fund ownership, I examine whether stocks held by hedge funds as marginal investors are more sensitive to changes in aggregate liquidity than comparable stocks held by other types of institutions or by individuals. After controlling for institutional preferences for stock characteristics, I find a positive relationship between hedge fund ownership and liquidity risk, and a negative relationship between bank ownership and liquidity risk. In addition, stocks held by hedge funds experience significant negative abnormal returns during liquidity crises, whereas stocks held by banks experience significant positive abnormal returns. These findings support the theory of Brunnermeier and Pedersen (2009) that funding constraints of leveraged speculators lead to a greater liquidity risk, and the theory of Gatev and Strahan (2006) that banks have a unique ability to hedge against market-wide liquidity shocks. In the second essay, I examine the liquidity of global bonds. Global bonds are international securities designed to be traded and settled efficiently in multiple markets. I document significant differences in liquidity and transaction costs between global and domestic bonds issued by the same firms, and find that the greater liquidity of global bonds is priced. These findings are consistent with microstructure models that predict a positive relationship between the number of potential investors and liquidity in over-the-counter markets. The findings also help to explain prior evidence that global bond offerings reduce the cost of debt.