Andrey D. Ukhov

Stock and Bond Market Liquidity: A Long-Run Empirical Analysis

This paper establishes liquidity linkage between stock and Treasury bond markets. There is a lead-lag relationship between illiquidity of the two markets and bidirectional Granger causality. The effect of stock illiquidity on bond illiquidity is consistent with flight-to-quality or flight-to-liquidity episodes. Monetary policy impacts illiquidity. The evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market. These effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short-term maturities. The paper provides evidence of illiquidity integration between stock and bond markets.

The Term Structure of Bond Market Liquidity and Its Implications for Expected Bond Returns

Previous studies of Treasury market illiquidity span short time periods and focus on particular maturities. In contrast, we study the time series of illiquidity for different maturities over an extended period of time. We also compare time-series determinants of on-the-run and off-the-run illiquidity. Illiquidity increases and the difference between spreads of long- and short-term bonds significantly widens during recessions, suggesting a “flight to liquidity,” wherein investors shift into the more liquid short-term bonds during economic contractions. Macroeconomic variables such as inflation and federal funds rates forecast off-the-run illiquidity significantly but have only modest forecasting ability for on-the-run illiquidity. Bond returns across maturities are forecastable by off-the-run but not on-the-run bond illiquidity. Thus, off-the-run illiquidity, by reflecting macro shocks first, is the primary source of the liquidity premium in the Treasury market.

Expanding the Frontier One Asset at a Time

We study the mean-variance optimization problem when investment opportunities are changing. We add a new risky asset to a set of n risky assets. An analytical relation between the original and the new minimum-variance frontiers is established. The two frontiers have a tangency point. We derive a new mutual fund theorem. All portfolios in the new minimum-variance set are portfolio combinations of three mutual funds: The two funds located on the original frontier and the third fund containing all assets. Analytical framework developed in the paper has implications for studies of testability of the mean-variance efficiency of a market portfolio (Roll critique). Implications for models of financial innovation are discussed.

Individual vs. Aggregate Preferences: The Case of a Small Fish in a Big Pond

We study the relationship between the risk preferences of individuals and the risk preferences of the aggregate economy. To emphasize the vast differences that can occur between individual and market preferences brought about through aggregation, we assume an economy consisting entirely of risk seekers. We show that such individuals can lead to an aggregate economy that is risk averse. The converse is also true. An aggregate economy that exhibits risk aversion does not imply an economy of individual risk averters. An economy demanding a risk premium can be formed from individuals who do not demand such compensation. Understanding the relationship between the preferences of individuals and the preferences of the aggregate economy is crucial for understanding the connection between the behavioral finance literature, which focuses on individual preferences, and the asset-pricing literature, which focuses on aggregate prices. We discuss empirical implications of these results. This paper was accepted by Wei Xiong, finance.

Financial Globalization and Risk Sharing: Welfare Effects and the Optimality of Open Markets

To study the welfare effects of investment barriers and the opening of markets to foreigners, we construct an equilibrium model of international asset pricing without agency costs that allows endogenous market participation among heterogeneous agents. Equilibrium prices and the set of participating and non-participating agents are jointly determined in equilibrium and the ability of agents to choose to participate in the market affects prices of domestic and foreign assets. We examine the welfare effects of non-participation and find that when a country moves from complete segmentation to open markets for foreigners, the cost of capital falls in the domestic market. This is consistent with empirical findings in the international asset pricing literature. Through the endogenous participation mechanism, our model is able to capture sources of economic growth. Contrary to previous models, however, we show that opening markets is not Pareto-optimal and we identify a class of domestic agents whose welfare is lower after the opening of markets. These finding have political economy interpretations and policy implications.

Preferences Toward Risk and Asset Prices: Evidence from Russian Lottery Bonds

This paper studies the relationship between investor risk preferences and asset returns. The paper provides direct evidence on the risk aversion of participants in a securities market. It uses the prices of lottery bonds issued by the Imperial Russian Government in 1864 and 1866 to estimate investor risk aversion and to study changes in preferences toward risk. Time variation in investor risk preferences is then compared to the dynamics of the Russian bond market over the period 1889 to 1904. Increases in risk aversion are positively associated with increases in the price of a risk-free asset. This result is in accord with economic intuition that higher risk aversion is associated with higher demand for a safe asset, and hence, higher equilibrium price of a risk-free security and a lower risk-free rate. Implications of a Consumption CAPM model for a relationship between changes in interest rates and changes of risk aversion are tested. Evidence supporting the model is found. The paper provides evidence on the role of risk aversion in securities market dynamics.

The Effect of Cost of Living on Employee Wages in the Hospitality Industry

This study examines the effect of cost of living (COL) on employee wages in the hotel industry. Although prior research clearly indicates that COL and wages are positively related, there is a lack of research explicitly considering the specific nature of the relationship between COL and wages, and potential moderators to the relationship. Using a dataset containing information on 97 jobs over 67 cities, our study shows that while there is a positive effect of COL on wages, the adjustment is not equal in magnitude to the difference that the COL levels would indicate. Furthermore, the effect of COL decreases as the average wage for the given job increases. We also show differences in COL’s effects for full-service versus limited-service hotels. We illustrate the implications of our findings by showing predicted wage rates for four jobs in five different cities, at both full-service and limit-service hotels. The study has implications for research, particularly for future work on COL and compensation. The findings also have important implications for practice, and may be particularly useful when managers need to set pay levels when local market data are unavailable.

Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility based Framework

We study the diversification benefits of REIT preferred and common stock using a utility based framework in which investors segment based on risk aversion. Taking the view of a long run investor, we conduct our analysis using data from 1992 to 2012. We examine optimal mean-variance portfolios of investors with different levels of risk aversion given access to different classes of assets and establish three main results. First, REIT preferred and common stock provides significant diversification benefits to investors. REIT common stock helps low risk aversion investors attain portfolios with higher returns, while REIT preferred stock helps high risk aversion investors by providing a venue for risk reduction. Both asset classes receive material allocations over plausible levels of risk aversion. Second, while REIT preferred stock appears to behave somewhat like a hybrid debt/equity asset, its risk/return profile appears to not easily be replicated by those asset classes. When given the opportunity, investors will reduce allocations to REIT common stock and investment grade bonds and invest in REIT preferred stock. Finally, realistic investor constraints matter empirically. Conclusions drawn from the empirical analysis are markedly different under these constraints compared to the classical unconstrained setting.

The Impact of Publicly Owned Hotels on Competing Properties

Substantial public subsidies, and even outright public ownership, of hotels have become common in the United States as communities target tourism as an integral economic development tool. A critical question that is increasingly being raised about the public sector entering the hotel business is, are these government-funded facilities unfair competition to properties developed by the private sector? The common reply to these concerns is that the publicly owned hotel is critical to growing demand for lodging accommodation and that once it opens, the new hotel will attract enough new business that all hotels will benefit. We use an event study to test this hypothesis across all of the 100% publicly developed hotels for which there are sufficient data to conduct the analysis. In looking at these 21 hotels, we found strong evidence that the performance of neighboring hotels worsens after the introduction of a publicly owned hotel.

Estimating Preferences Toward Risk: Evidence from Dow Jones

What do investor utility functions look like? We show how returns on a stock and prices of call options written on that stock can be used jointly to recover utility of wealth function of the marginal investor in the stock. We study whether non-standard preferences have an impact sufficiently large that it is present in the stock prices. Using options on the stocks in the Dow Jones Index, we show support for non-concave utility functions with reference points proposed by Kahneman and Tversky, Friedman and Savage, and Markowitz. The evidence for Kahneman and Tversky Prospect Theory value function, and Friedman and Savage and Markowitz utility functions is much stronger than the support for the standard concave utility function. Together the utility functions with convex regions and with reference points account for 80% of the market capitalization of the sample stocks. This is the first study to report findings of these utility functions using the prices of individual stocks (nonexperimental data). We also investigate a closely related question of whether different assets reflect different risk preferences. We find evidence showing that different stocks reflect different types of investor utility function.