Abstract
This paper is the first to examine liquidity in 37 stock markets around the world. We find volatility to be a very important driving factor for market illiquidity. A highly volatile market leads to a illiquid financial market. Stock market illiquidity condition also tends to persist. Using a series of regression and Granger causality tests, we find a strong contemporaneous negative relationship between illiquidity shocks and market returns. Also stock market downturn has Granger caused illiquidity and not the other way round. Regional and U.S. stock market returns donot affect local stock market illiquidity. Regional and U.S. stock market illiquidity, on the hand, affect local illiquidity. Nevertheless, the greatest cause of illiquidity is local stock market returns. Similar relationships were observed during the Asian financial crisis. Hong Kong illiquidity shocks have propagated to the other countries around the world except the Latin American stock markets.
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