Corporate bonds are traded at the Tel Aviv Stock Exchange like stocks, by a limit order book, wit... more Corporate bonds are traded at the Tel Aviv Stock Exchange like stocks, by a limit order book, with high investor participation and narrower spreads relative to the stock market. Using data with trader identification we focus on small retail investors. Their average execution costs (0.067%), which are lower than for stocks, are lower than half of the quoted spreads because they tend to act as "makers" or delay "taking" when spreads are high. These findings are in contrast to U.S. corporate bond OTC markets where corporate bond spreads are higher, retail participation is very low and trading costs are high.
We present a structural method for measuring the upper bound for illiquidity risk for stocks and ... more We present a structural method for measuring the upper bound for illiquidity risk for stocks and bonds of a levered firm. The method enables one to calculate the upper bound of illiquidity spread for a corporate bond given its time to maturity and the issuing firm’s asset risk and leverage ratio. Thus, illiquidity spread is determined by both the firm’s business and financial risk. All else equal, illiquidity spread of a corporate debt is lower than that of a levered stock of the same issuer. Aligned with empirical evidence, we find that illiquidity spread is positively related to the issuing firm's asset risk and leverage ratio and that the size of illiquidity spread out of the total yield spread increases with a bond’s credit quality. Moreover, while the literature shows mixed results regarding the term structure of illiquidity spread, the method yields an inverse U-shaped relationship between duration and the yield spread, where the point in which the curve reach its maximum ...
ABSTRACT Using data from the Tel Aviv Stock Exchange with trader identification, we identify smal... more ABSTRACT Using data from the Tel Aviv Stock Exchange with trader identification, we identify small retail investors' (SRI) activity in stocks. We measure their execution costs using the day's closing prices as benchmarks. On average, the execution costs are 0.099%. These costs are much smaller than the effective spread since in half of the cases SRI use limit orders that incur very small costs. Execution costs of sellers are larger than those of buyers because they use more market orders and they face more informed trading. Variables that explain stocks' execution costs are stocks' volume and return standard deviation.
ABSTRACT Using a unique and proprietary database, we estimate the effect of non-marketability on ... more ABSTRACT Using a unique and proprietary database, we estimate the effect of non-marketability on the cost (to the firm) and the value (to risk-averse and non-diversified employees) of restricted stock grants. The estimation is conducted by calibrating theoretical models that account for the non-marketability effect on securities' value. The average cost of a restricted stock grant has a 12.4% discount and the value has a 30.4% average discount (both relative to the market price of a marketable stock), which yields an average cost-value difference of 18%. The discount depends on the vesting period and the stock's volatility and is robust across time and across industries. The findings have implications on the efficiency and usefulness of restricted stock grants, which are currently the dominant component in executive pay.
Corporate bonds are traded at the Tel Aviv Stock Exchange like stocks, by a limit order book, wit... more Corporate bonds are traded at the Tel Aviv Stock Exchange like stocks, by a limit order book, with high investor participation and narrower spreads relative to the stock market. Using data with trader identification we focus on small retail investors. Their average execution costs (0.067%), which are lower than for stocks, are lower than half of the quoted spreads because they tend to act as "makers" or delay "taking" when spreads are high. These findings are in contrast to U.S. corporate bond OTC markets where corporate bond spreads are higher, retail participation is very low and trading costs are high.
We present a structural method for measuring the upper bound for illiquidity risk for stocks and ... more We present a structural method for measuring the upper bound for illiquidity risk for stocks and bonds of a levered firm. The method enables one to calculate the upper bound of illiquidity spread for a corporate bond given its time to maturity and the issuing firm’s asset risk and leverage ratio. Thus, illiquidity spread is determined by both the firm’s business and financial risk. All else equal, illiquidity spread of a corporate debt is lower than that of a levered stock of the same issuer. Aligned with empirical evidence, we find that illiquidity spread is positively related to the issuing firm's asset risk and leverage ratio and that the size of illiquidity spread out of the total yield spread increases with a bond’s credit quality. Moreover, while the literature shows mixed results regarding the term structure of illiquidity spread, the method yields an inverse U-shaped relationship between duration and the yield spread, where the point in which the curve reach its maximum ...
ABSTRACT Using data from the Tel Aviv Stock Exchange with trader identification, we identify smal... more ABSTRACT Using data from the Tel Aviv Stock Exchange with trader identification, we identify small retail investors' (SRI) activity in stocks. We measure their execution costs using the day's closing prices as benchmarks. On average, the execution costs are 0.099%. These costs are much smaller than the effective spread since in half of the cases SRI use limit orders that incur very small costs. Execution costs of sellers are larger than those of buyers because they use more market orders and they face more informed trading. Variables that explain stocks' execution costs are stocks' volume and return standard deviation.
ABSTRACT Using a unique and proprietary database, we estimate the effect of non-marketability on ... more ABSTRACT Using a unique and proprietary database, we estimate the effect of non-marketability on the cost (to the firm) and the value (to risk-averse and non-diversified employees) of restricted stock grants. The estimation is conducted by calibrating theoretical models that account for the non-marketability effect on securities' value. The average cost of a restricted stock grant has a 12.4% discount and the value has a 30.4% average discount (both relative to the market price of a marketable stock), which yields an average cost-value difference of 18%. The discount depends on the vesting period and the stock's volatility and is robust across time and across industries. The findings have implications on the efficiency and usefulness of restricted stock grants, which are currently the dominant component in executive pay.
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