Abstract
The aim of the paper is to examine commonality in liquidity indices across emerging European stock markets. Five markets are included in the study: Hungarian, Czech, Polish, Russian and Turkish, in the period from 2008 to 2017. We propose liquidity indices that are based on low-frequency liquidity proxies and capture both the dynamics coming from volume and price changes. We find strong commonality of the liquidity indices across all examined markets which is robust to the choice of liquidity proxy. The dependence between indices enhances in times of crisis and large market declines, and weakens when markets become stable. We also examine the interdependency between liquidity and volatility estimates and find that liquidity on the European emerging markets is related to CBOE Volatility Index (VIX). Liquidity in the whole region decreases when VIX increases, and vice versa. The liquidity indices based on the extreme market movements show that there are no differences in commonality in time of extreme negative and positive returns.
Highlights
There is evidence in the literature that individual stock liquidity as well as market liquidity varies over time [1]
As no single liquidity proxy is shown to be the best measure of unobservable liquidity, we examine the co-movement of indices constructed on the basis of various liquidity measures
First we examine the cross-sectional patterns in the liquidity indices based on different liquidity proxies within the markets, we study the commonality in these indices across the markets in the region
Summary
There is evidence in the literature that individual stock liquidity as well as market liquidity varies over time [1]. There is a number of studies devoted to commonality in liquidity, that is a co-movement of liquidity measures over time [2]. This commonality might be examined for individual assets listed on a given market [3,4,5]. On the market level it is focused on the search for contemporanous co-movements in liquidities across different markets [2,6,7,8]. As the liquidity of the stocks and of the broader markets evolves, the important issue arises: are there any patterns in liquidity across the markets? If yes, what are the common underlying determinants of the liquidity? What drives the commonality of liquidity measures across the markets?
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