Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123764
Authors: 
Fontaine, Jean-Sébastien
Garcia, René
Gungor, Sermin
Year of Publication: 
2015
Series/Report no.: 
Bank of Canada Working Paper 2015-12
Abstract: 
Following theory, we check that funding risk connects illiquidity, volatility and returns in the cross-section of stocks. We show that the illiquidity and volatility of stocks increase with funding shocks, while contemporaneous returns decrease with funding shocks. The dispersions of illiquidity, volatility and returns widen following funding shocks. Funding risk is priced, generating a returns spread of 4.25 percent (annually) between the most and least illiquid portfolios, and of 5.30 percent between the most and least volatile portfolios. Estimates are robust using mimicking portfolio returns, alternative portfolio sorts, traditional test assets, other risk factors, monthly returns or quarterly returns.
Subjects: 
Asset pricing
Financial markets
JEL: 
E43
H12
Document Type: 
Working Paper

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