The results suggest that the higher returns associated with contrarian investment strategies are the result of the higher illiquidity associated with value portfolios.
What is overlooked in the declining spreads for high-yield debt is that this spread is not only supposed to compensate for default risk, but also for high yield's higher illiquidity when the economy contracts.
These results suggest that the higher returns associated with contrarian investment strategies are the result of the higher illiquidity associated with value portfolios and represent compensation that the investor receives for accepting illiquidity.
However, the results are not as obvious when comparing Period 2 to Period 3 with lower bid-ask spread from 0.00746 to 0.00619, higher illiquidity from 0.24316 to 0.41473 and effectively no change in return volatility from 0.00137 to 0.00108.
Therefore, higher values of AMH indicate higher price movements in response to trading volume and thus, higher stock illiquidity.
Correspondingly, the results presented in Table 4, Panel B, indicate that illiquidity is higher for the higher book-to-market portfolio relative to the lower book-to-market portfolio, for all three types of portfolio groupings, without exception.
Better, surely, to price in risk when the decision to allocate capital is being made?Determining the cost of funding is not easy, particularly for structured products where risks of illiquidity are higher.
The company said: "On the basis of the performance in the first half, the board now believes that, as a result of the weakness being experienced in our Asian operations and the continued illiquidity in high-value stock items, it is unlikely that the group will achieve the market forecast for the full year".
In other words, investors are compensated with higher returns for facing illiquidity.
