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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Funding Risk Measures with Cross-Sectional Variation |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 83 |
| Date | 2021 |
| Abstract Text | This thesis examines the impact of haircut-induced funding constraints on asset returns. It is well understood that funding frictions have an asset pricing implication and can serve as one possible explanation for asset pricing puzzles such as the low beta anomaly. It is found that asset mispricing prevails in times of tight market wide funding frictions and high TED spreads (Frazzini and Pedersen, 2014). In a similar vein, funding frictions on the investor level can also explain the demand of leverage constrained investors for high beta stocks and products with embedded leverage (Frazzini and Pedersen, 2012). This strand of literature examines funding frictions that can be explained by idiosyncratic characteristics of agents. While the aforementioned approaches shed light on the broader impact of funding frictions and the longitudinal structure of overall asset returns, I investigate the impact of margin requirements on single asset returns. Starting from the notion that stricter imposed margin requirements limit the collateral value of an asset, I expect a positive relationship between margin requirements and asset returns. As explained by Brunnermeier and Pedersen (2009) and Chen and Lu (2019), margin requirements in particular rely on single-asset volatility. This is also one main cornerstone of liquidity spirals that arise in times of rising single asset volatility and drying out market liquidity (Brunnermeier and Pedersen, 2009). In my empirical analysis, I approximate margin requirements by establishing an algorithm that calculates the GARCH-predicted single asset volatility of daily stock returns at any given point in time. Then, I extend the standard CAPM model as proposed by Sharpe (1964) and Lintner (1965) and introduce a margin measure that shall provide additional explanatory power to the linear asset pricing model. In addition, instead of assuming a global factor and individual factor loadings to exist, I calculate the margin measure for each individual stock. I argue that this approach has theoretical advantages over a set-up with a global factor and individual factor loadings. |
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