Econ 514: Long PaperReplication of Acharya and Pedersen (2005) with Korean stock data

Presenter: Lee, Ji YonDepartment of Economics

Rutgers University

Abstract

• Replication of Acharya and Pedersen (2005) with Korean stock market data.

• Proposed to find the empirical value for commonality between the portfolio illiquidity, sensitivity of the portfolio return to market illiquidity and the sensitivity of the portfolio illiquidity to market return in Korean stock market.

Illiquidity Measure

• Estimate, in each month of the sample, a measure of illiquidity for each individual security i.

• the Amihud measure for illiquidity:

substituted by

where and are monthly returns and monthly volumes respectively.

• Form a ‘‘market portfolio’’ and sets of 25 test portfolios sorted on the basis of illiquidity

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Innovations in Illiquidity

• For the market portfolio as well as the test portfolios, we estimate the innovations in illiquidity.

[Figure 1] Standardized Innovations in Korean Stock market illiquidity from 1996-2006

Beta Calculation

• Using these illiquidity innovations and returns, we estimate and analyze the liquidity betas:

Illiquidity Portfolios

Fitted CAPM of Illiquidity portfolios I• Consider the empirical fit of the (unconditional) liquidity-

adjusted CAPM by running cross-sectional regressions.

Fitted CAPM of Illiquidity portfolios II

• To see the possible reasons for the poor fits of the liquidity CAPM models, the unrestricted model is extended to include market capitalization and book-to-market value. (Table 7 in the Acharya and Pederson)

• Further, apply and examine Fama-French three factor model to the Korean data with and without 4 betas.

Extension

CAPM including Market Cap and PER

Substituded by P/E ratio

CAPM including Market Cap and BE/ME

• Including the assets only whose shareholder’s equity data are available .• The data period is from 2002 to 2005.

CAPM Prior Year 2000

CAPM After Year 2000