Abstract
A stock’s liquidity and its variability over time are of major concern for all the stakeholders of capital markets. Literature shows that market participants prefer liquid stocks and a stock’s exposure to liquidity commonality is inversely proportional to market returns. Although the burgeoning literature on liquidity commonality shows that stocks have significant commonality, the major sources that cause it are yet unknown. Some studies have shown evidence for the supply-side determinants of liquidity commonality driven by funding constraints faced by market participants and some studies show evidence for the demand-side sources of liquidity commonality related to the correlated trading activity, level of institutional ownership. In this paper, we study the evolution of liquidity commonality over time by using quarterly data from 2001-2009 for NSE listed stocks and then determine the supply-side and demand-side sources of systematic liquidity. We construct Amihud’s liquidity measure using daily data as a proxy for liquidity and estimate liquidity commonality of each stock on a quarterly basis from the market model time series regression of Chordia, Roll, and Subrahmanyam (2000). We find significant evidence of liquidity commonality for the sample period and also size effects in liquidity commonality. We find that supply-side sources of liquidity commonality significantly explain liquidity commonality, whereas, the demand-side sources are not significant in explaining liquidity commonality.
Published Version
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