Abstract
Market liquidity ensures the marketability of security and is an indispensable feature of stock markets. Previous studies have emphasized the role of stock market liquidity in empirical finance. However, they have inadequately explored its multidimensional nature. This study eliminates the ambiguities related to market liquidity by precisely measuring it by using popular and proven liquidity measures. As such, the present study aims to evaluate market liquidity in terms of depth, breadth, tightness, and immediacy in the Indian equity market and also identifies crucial interdependencies between liquidity dimensions. The study selects 500 stocks constituting the NIFTY 500 index of the National Stock Exchange, India, as of 26th May 2019. The data on trading volume, bid price, ask price, the number of shares outstanding, closing share prices were retrieved for the period from 1st April 2009 to 31st March 2019. The study employs Share Turnover, Amihud Illiquidity Ratio, Relative Quoted Spreads, and Coefficient of Elasticity of Trading for liquidity measurement. The Vector Auto-Regressive (VAR) model is used to establish the simultaneous relationships between liquidity dimensions. The analysis is conducted at the aggregate market level as well as across turnover based stock groups divided based on their rankings in terms of stock specific share turnover. The empirical results evidenced the presence of consistent depth, strong breadth, and immediacy but lower tightness in the Indian equity market. The market depth and tightness appear to be relevant in determining dimensional interdependencies. Also, less frequently traded stocks exhibit higher illiquidity in the wake of lower tightness. The findings of this study will assist the investors to wisely understand the multifaceted nature of market liquidity and base their trading decisions accordingly. Moreover, the regulators of the stock exchange can devise liquidity enhancing policies based on the directional movements among liquidity dimensions.
Highlights
Market liquidity is referred to as the marketability of security [1] and is an essential component of equity markets
The mean values depict the higher value of Coefficient of Elasticity of Trading (CET), and lower value of Amihud Illiquidity Ratio (AR) in comparison to other measures, thereby indicating that large volumes of security can be traded in the market without any delay in time at a lower price impact
The current study aims to measure the liquidity of the Indian equity market and investigates the extent of interdependency between different dimensional aspects of market liquidity
Summary
Market liquidity is referred to as the marketability of security [1] and is an essential component of equity markets. It generally refers to the ease with which a security can be exchanged at a given price. A consistent level of market liquidity is of relevance to the market participants, firms and regulators since it ensures continuity in trade at desired prices, regulates the cost of raising capital and allows frictionless functioning of the equity market. Https://www.bloomberg.com/professional/ solution/bloomberg-terminal/) for researchers who meet the criteria for access to data
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