Sources of Alpha
7 important questions on Sources of Alpha
Compnesation for market liquidit risk
Fist is just market beta, cov(Ri, Rm)
second is the beta of illiquidy of i and illiquidity of the market, if a product comoves with the illiquidity of the market investors require an higher return, how higher this beta how higher the compensation for this sort of illiquidity.
The third is the illiquidity is compenstation for illiquidity if the market falls, so if the market drops and the product is not sellable .
The last is a premium if the market becomes illiquidit and but the return becomes negtive.
The liquidity adjusted capm also shows what happes during a liquidity crisis
How to generate a liquidity premium
- If there is a high bid-ask spread, they provide liquidity, take an other side of trades, and smoothing out hte price fluctuations. The compensation for the risk associated with these liquidity services is the profit due to bid-ask spreads or market impacts.
High-frequency hedge funds often effectively play the role of market makers. Some hedge funds are effectively market makers in OTC markets
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So what is one explanation for the failure of the CAPM?
Compensation for market and funding liquidity risk can operate at the same time?
Demand pressure Behavioral biases,
- Dupont is not that populair but is one of the biggest companies in the industrie
Data mining and biases
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