Examining the dynamics of illiquidity risks within the phases of the business cycle
The Fama-French (FF) five-factor model is cast into a dynamic setting to capture the impact of illiquidity over the phases of the business cycle on the returns of the passive FF twelve sector portfolios. We use two dynamic approaches, Kalman filtering and a recursive/rolling robust instrumental vari...
| Main Authors: | , , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
Elsevier
2019-06-01
|
| Series: | Borsa Istanbul Review |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S221484501830228X |
| _version_ | 1797991943471366144 |
|---|---|
| author | François-Eric Racicot William F. Rentz Alfred Kahl Olivier Mesly |
| author_facet | François-Eric Racicot William F. Rentz Alfred Kahl Olivier Mesly |
| author_sort | François-Eric Racicot |
| collection | DOAJ |
| description | The Fama-French (FF) five-factor model is cast into a dynamic setting to capture the impact of illiquidity over the phases of the business cycle on the returns of the passive FF twelve sector portfolios. We use two dynamic approaches, Kalman filtering and a recursive/rolling robust instrumental variables (IV) algorithm cast into a GMM framework, to determine time-varying alpha and beta estimates. Our principal result is that the Kalman filter approach supports the hypothesis that illiquidity is an important risk factor in a dynamic context. However, the only factor found to matter in the dynamic GMM approach is the market risk premium. Nevertheless, illiquidity may be prescient with respect to financial crises. Keywords: Illiquidity, Fama-French five-factor model, Kalman filter, Robust IV algorithm, JEL Classification: C58, G12 |
| first_indexed | 2024-04-11T09:00:15Z |
| format | Article |
| id | doaj.art-1a50198abdb148f59c54d45687cc6371 |
| institution | Directory Open Access Journal |
| issn | 2214-8450 |
| language | English |
| last_indexed | 2024-04-11T09:00:15Z |
| publishDate | 2019-06-01 |
| publisher | Elsevier |
| record_format | Article |
| series | Borsa Istanbul Review |
| spelling | doaj.art-1a50198abdb148f59c54d45687cc63712022-12-22T04:32:48ZengElsevierBorsa Istanbul Review2214-84502019-06-01192117131Examining the dynamics of illiquidity risks within the phases of the business cycleFrançois-Eric Racicot0William F. Rentz1Alfred Kahl2Olivier Mesly3Telfer School of Management, University of Ottawa, 55 Laurier Ave. East, Desmarais Bldg., Ottawa, ON K1N 6N5, Canada; Affiliate Research Fellow, IPAG Business School, Paris, France; Corresponding author. Telfer School of Management, University of Ottawa, 55 Laurier Ave. East, Desmarais Bldg., Ottawa, ON K1N 6N5, Canada.Telfer School of Management, University of Ottawa, 55 Laurier Ave. East, Desmarais Bldg., Ottawa, ON K1N 6N5, CanadaTelfer School of Management, University of Ottawa, 55 Laurier Ave. East, Desmarais Bldg., Ottawa, ON K1N 6N5, CanadaICN Business School and University of Loraine, FranceThe Fama-French (FF) five-factor model is cast into a dynamic setting to capture the impact of illiquidity over the phases of the business cycle on the returns of the passive FF twelve sector portfolios. We use two dynamic approaches, Kalman filtering and a recursive/rolling robust instrumental variables (IV) algorithm cast into a GMM framework, to determine time-varying alpha and beta estimates. Our principal result is that the Kalman filter approach supports the hypothesis that illiquidity is an important risk factor in a dynamic context. However, the only factor found to matter in the dynamic GMM approach is the market risk premium. Nevertheless, illiquidity may be prescient with respect to financial crises. Keywords: Illiquidity, Fama-French five-factor model, Kalman filter, Robust IV algorithm, JEL Classification: C58, G12http://www.sciencedirect.com/science/article/pii/S221484501830228X |
| spellingShingle | François-Eric Racicot William F. Rentz Alfred Kahl Olivier Mesly Examining the dynamics of illiquidity risks within the phases of the business cycle Borsa Istanbul Review |
| title | Examining the dynamics of illiquidity risks within the phases of the business cycle |
| title_full | Examining the dynamics of illiquidity risks within the phases of the business cycle |
| title_fullStr | Examining the dynamics of illiquidity risks within the phases of the business cycle |
| title_full_unstemmed | Examining the dynamics of illiquidity risks within the phases of the business cycle |
| title_short | Examining the dynamics of illiquidity risks within the phases of the business cycle |
| title_sort | examining the dynamics of illiquidity risks within the phases of the business cycle |
| url | http://www.sciencedirect.com/science/article/pii/S221484501830228X |
| work_keys_str_mv | AT francoisericracicot examiningthedynamicsofilliquidityriskswithinthephasesofthebusinesscycle AT williamfrentz examiningthedynamicsofilliquidityriskswithinthephasesofthebusinesscycle AT alfredkahl examiningthedynamicsofilliquidityriskswithinthephasesofthebusinesscycle AT oliviermesly examiningthedynamicsofilliquidityriskswithinthephasesofthebusinesscycle |