大浩浩的笔记课堂——FRM考试学习笔记140

Topic 69 Illiquid Assets

1.Liquid asset markets:

⑴sources of illiquidity:

Market imperfections encourage illiquidity in asset markets:

①clientele effects and participation costs

②transaction costs(commissions,taxes,due diligence fees)

③search frictions(It is difficult to find an appropriate buyer or seller.)

④asymmetric information(Information is a form of search friction.)

⑤price impact

⑥funding constraints due to highly leverage

⑵characteristics of illiquid markets:

①Most asset classes are illiquid，at least to some degree,except for "plain-vanilla" public equities and fixed income.

②Illiquid asset markets are large.

③Investors hold lots of illiquid assets or illiquid assets comprise the bulk of most investor´s portfolios.

④Liquidity drives up even in liquid asset markets:

A.Financial distress causes markets to freeze.

B.Liquidity driving up leads the global liquidity crises.

2.Illiquid asset reported returns are not returns:

⑴introduction:

In general,investors should be skeptical of reported returns in illiquid asset markets as they are generally overstated.

⑵bias:

Biases that impact reported illiquid asset returns:

①survivorship bias:

A.Poor performing funds often quit reporting results,ultimately fail,or never begin reporting returns because performance is weak.(reporting bias)

B.We should remove survivorship bias by observing entire population of funds.

C.Unfortunately,in illiquid asset markets,we never observe the full universe.

②infrequent sampling/trading:

Betas,volatilities and correlations are too low when they are computed using the reported returns of infrequently traded assets.

③unsmoothing bias:

A.Unsmoothing affects only risk estimates and not expected returns.

B.Unsmoothing has no effect if the observed returns are uncorrelated.

C.Unsmoothing is an art.

D.unsmoothed real estate returns

·特别注意！

·Unsmoothing adds noise back to reported returns to uncover the true,nosier returns.This process affects risk and return estimates and could have a dramatic effect on returns.

④selection bias:

A.Sample selection bias results from the tendency of returns only to be observed when underlying asset values are high.

B.Distressed companies are usually not formally liquidated,and these "zombie" companies are often left as shell companies.

3.Illiquidity risk premiums:

⑴to compensate investors:

①for the inability to access capital immediately

②for the withdraw of liquidity during illiquidity crisis

⑵harvesting illiquidity risk premiums:

①setting a passive allocation to illiquid asset classes,like real estate

②engaging in liquidity security selection(holding less liquid securities by choosing securities within an asset class)

③acting as a market maker at the individual security level

④engaging in dynamic strategies(rebalancing) at the aggregate portfolio level:

A.Such as taking long positions in illiquid assets and short positions in liquid assets.

B.This is the easier to implement and can have the greater effect on portfolio returns.

⑶illiquidity risk premiums across asset classes:

"There is a reward to bearing illiquidity across asset classes."→It is NOT true(It is flawed):

①There is illiquidity biases.

②It ignores risk.

③There is no "mancet index" for illiquid asset classes.

④You can not separate factor risk from manager skill.

⑷illiquidity risk premiums within asset classes:

①U.S. Treasuries

②corporate bonds

③equities

④illiquid assets

⑤Why illiquidity risk premiums manifest within but not across asset classes:

A.limited integration across asset classes

B.asset class illiquidity risk premium might be small because investors overpay for illiquid asset classes

⑥market making:

A.market maker→to supply liquidity,but costly

B.dimensional funds advisors(DFA)

C.large asset owners such as sovereign wealth funds or large pension funds

⑦secondary markets for private equity and hedge funds:

A.The 2 forms of secondary markets in private equity:a/ secondary market buyout markets

b/ secondary market for LPs

B.Discounts for hedge funds are much smaller than private equity.

C.They are tremendous opportunities for large asset owners to supply liquidity.

⑧adverse selection:

A.A market maker faces a risk that a buyer has nonpublic information.

B.A DFA can fully disclose informed on stocks.

⑸rebalancing—top-down asset allocation decision:

Rebalancing is the simplest way to provide liquidity in top-down asset allocation decision.

4.Portfolio choice with illiquid assets:

⑴asset allocation with large transaction costs:

①The optimal strategy is to trade whenever risky asset positions hit upper or lower bounds.

②The shortcoming is that they assume trade is always possible by paying a cost.

⑵asset allocation with infrequent trading(long times between trading):

①Illiquidity markedly reduces optimal holdings.

②Rebalancing illiquid assets to positions is below the long-run average holding:

The optimal trading point of illiquid assets is lower than the long-run average holding.

③It consumes less with illiquid assets.

④There are no illiquidity "arbitragers".

⑤Investors must demand high illiquidity hurdle rates.

⑶asset allocation with other impacts:

①Illiquid assets do not deliver higher risk-adjusted returns:

Several variables related to illiquidity that are shown to impact equity returns:

A.bid-ask spreads/volume/turnover

B.volume measured by whether the trade was initiated by buyers or sellers

C.the ratio of absolute returns to dollar volume

D.the price impact of large trades/informed trading measures(adverse selection)

E.quote size and depth/the frequency of trades

F.the number of zero returns/return autocorrelations

②There is agency problems,one must rely on the talents and skills of portfolio managers.It is difficult to monitor external manager.

③In many firms,illiquid assets are managed separately from the rest of the portfolio.

④Illiquid asset investors face high idiosyncratic risks.

⑷the conclusion:

①Portfolio choice models with illiquid assets recommend holding only modest amounts of illiquid assets.

②Investors should demand high illiquidity risk premiums.

·特别注意！

·Artificially low asset class correlations leading to the appearance of low systematic risk is a bias faced by hedge funds with illiquid holdings that use monthly valuation data→using regression with additional lags of the market of factors and sum the coefficients across lags.

5.Liquidating Harvard redux:

⑴the case for illiquid asset investing:

It does not offer high risk-adjusted returns,agency problems,idiosyncratic risk.

⑵investment advice for endowments:

①To hold large amounts of fixed income.

②To invest internally "research and teaching".("social dividend")

⑶liquidate Harvard:

There are some limited outcomes such as to liquidate a portion of the endowment,cut expenses,increase donations,increase the revenue and borrow.

大浩浩的笔记课堂之FRM考试学习笔记合集