Essays on volatility timing and centrality-driven liquidity in equity and cryptocurrency markets

Abstract

This thesis includes three substantive chapters that collectively explore key aspects of risk and asset pricing across different markets. Two chapters empirically study the volatility timing effects in equity and cryptocurrency markets. Another chapter studies the relationship between stock liquidity and centrality based on mutual funds' common ownership of stocks. These chapters, while examining distinct markets and aspects, are unified by their emphasis on the connection among volatility, liquidity, and the compensation demanded by risk-averse investors for higher risks associated with volatility and illiquidity. Chapter 3 exploits the low-risk anomaly in the stock market and the empirically successful volatility timing strategy, improving portfolio returns and investor utility by constructing portfolios using option-based forward-looking volatility which better incorporates market expectations on risks. Chapter 4 develops a stock-level Connectedness-Weighted-Eigenvector-Centrality (CWEC) measure that proxies stocks' importance in the broad financial network by considering the strength of each link between pairwise stocks and the importance of each stock's neighbour in the network. Through panel regressions, vector autoregression analyses, and impulse response functions, this chapter demonstrates that stock centrality appears to have a preponderant effect on illiquidity and highlights the market's differentiated perception of stocks with varying centrality levels. Chapter 5 confirms the presence of the risk anomaly in the cryptocurrency market and examines the realised volatility timing strategy under specific market conditions. This chapter provides empirical insights into the nuanced effectiveness of volatility timing in a speculative and sentiment-driven market environment. Overall, this thesis provides rich empirical evidence on volatility and liquidity risk management and portfolio allocation, affording researchers and practitioners valuable insights into the asset pricing topics.

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Identifiers

ORCID for Basel Halak: orcid.org/0000-0003-3470-7226

ORCID for Leonardo Aniello: orcid.org/0000-0003-2886-8445

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