2020- Working Papers: Finance, Accounting and Insurance
Liquidity of securities, 28 pp.
E. Benmelech, N. Bergman and S. Frenkel
(Working Paper no. 7)
We analyze the liquidity of a general security, whose cash flow is defned over the payoffs of an underlying asset. Examples include debt, equity, and options. Liquidity of the security arises endogenously in a micro-structure framework where traders have different levels of information. The equilibrium in this framework is unique and enjoys a number of useful properties for conducting comparative statics. It can be used to understand how the cash flow rights of the financial security and changes in the payoff distribution of the underlying asset affect the financial security's liquidity. We then use this framework to analyze liquidity of debt within a specific log-normal environment. We explore how this liquidity is affected by properties of the debt contract, by the distribution of the underlying asset, by a change in the amount of informed trading. We show that bad news about the value of the underlying asset indeed increase debt illiquidity.
Lending along the supply chain, 40 pp.
D. Amiram, X. Li and E. Owens
(Working Paper no. 9/2020)
Research no.: 03890100
Despite the fact that economic interconnections among firms are very common, there is little research that examines the equilibrium outcome of such interconnections in credit markets. We examine how supply chain interconnections among borrowers within a lender’s loan portfolio affect equilibrium loan spread and lead arranger share in the syndicated loan market. We find that both loan spread and lead arranger share are significantly lower when the lead arranger has a preexisting loan with the borrower’s major customer. This finding suggests that such “supply chain loans” ease syndicate participants’ moral hazard concerns more than they exacerbate concerns about adverse selection. We further document that these effects are stronger where syndicate participants’ information asymmetry concerns are more pronounced. Consistent with supply chain loans providing benefits to both the borrower and lead arranger, we provide evidence that a borrower is more likely to obtain a loan from a lender who already has an existing loan with its key customer. Our findings provide insights into the mechanisms through which supply chain interdependencies, and more generally, economic relationships, affect debt markets.
The information environment, volatility structure,and liquidity, 53 pp.
D. Amiram, B. Csernaz, A. Kalay and A. Levy
(Working Paper no. 10/2020)
Research no.: 03820100
A central theme in existing literature is that increased disclosure and transparency reduce the level of information asymmetry between market makers and informed traders and thus increase liquidity. In contrast, in this study we propose and empirically investigate a new and unexplored channel through which the information environment can affect liquidity. We predict that for a given level of information asymmetry, or even absent information asymmetry, reduced disclosure and less transparent information environments make changes in the firm's stock price more discontinuous (jumpy) and hence change the structure of volatility. We further predict that market makers reduce liquidity as a result, because it is significantly more difficult for them to hedge discontinuous price changes (jump volatility) to their inventory than continuous price changes (diffusive volatility). Using both associations and causal tests we find a negative relation between the transparency of the information environment and jump volatility. We then show that jump volatility is negatively associated with liquidity, even after controlling for information asymmetry, while diffusion has a positive association. Finally, we present causal evidence that the information environment affects liquidity through jump volatility. Our findings have implications for our understanding of liquidity, corporate finance decisions, and policy-makers.
