Commonality in Liquidity: What Does the Order Book Say?

Abstract

Taking the cost of trading as a liquidity proxy, we provide evidence of commonality in liquidity and look for sources of it in an emerging market, Turkey. We show that the commonality in non-index stocks is higher than the commonality in index stocks. As the position size to trade increases, the strength of commonality is preserved for the former, however it decreases for the latter, which is argued to depend on the differences in the behaviors of individual and institutional investors. Regarding non-index stocks, we also reveal that buy side liquidity has a stronger commonality than sell side liquidity for small positions to trade, whereas it is the opposite case for large trading positions, a possible outcome of the individual investors' positive bias towards recent market performance. Further analysis on ownership effect shows that for mid-to-large cap firms, institutional investors are the main source of commonality in liquidity as expected, whereas individual investors are the main influence on commonality for small cap firms. A time varying perspective reveals that among several domestic and global macro-economic variables, liquidity commonality is significantly affected only by the interest rate decisions and GDP announcements of U.S.; and it tends to increase when the market is falling and/or volatile.