Abstract
When stock markets are less liquid or illiquid, investors are expected to require compensation for taking the risk of not being able to sell quickly. Many studies have documented the existence of the co-movements (commonality) of market liquidity in equity markets as a priced factor. The primary objective of this paper is to introduce the oil market as a potential source of commonality in liquidity. We hypothesize that conditions specific to the oil market can contribute to commonality in liquidity affecting both supply-side and demand-side factors because of its importance to the global economy in general. To this aim, a sample of firms is drawn from 50 countries spanning the period from January 1995 to December 2015. We examine two channels that transmit the effect of oil market movements to the liquidity commonality in international equity markets, namely, oil price returns and oil price volatility. Seemingly unrelated regressions (SUR) are utilized to estimate the effect of oil factors on commonality in liquidity. We find that the returns and volatility of oil prices explain the commonality in liquidity in countries with higher integration with oil markets. In addition, we show that the effect of oil volatility is more pronounced for net oil exporters as opposed to net oil importers after controlling for oil sensitivity. These results are robust to controlling for possible sources of commonality in liquidity as found in the literature and alternative estimation specifications.
Highlights
Stock market liquidity is defined as the ease of buying and selling a certain stock without a loss in value and is one of the most significant measures that gauge the efficiency of equity markets
Consistent with Karolyi et al (2012), we found that commonality in liquidity is associated with decreased market returns, time, capital market openness, and US sentiment but increased market volatility, market turnover, credit constraints, and turnover commonality (R2turnover )
This paper explores the impact of oil market returns and volatility on commonality in liquidity, especially in economies that are sensitive to oil market movements
Summary
Stock market liquidity is defined as the ease of buying and selling a certain stock without a loss in value and is one of the most significant measures that gauge the efficiency of equity markets. If stock markets are less liquid or illiquid, investors are expected to require compensation for taking the risk of not being able to sell quickly when trading stocks. Many studies have documented the existence of the co-movements (commonality) of market liquidity in equity markets and that it is a priced factor.1 Acharya and Pedersen (2005). Examined commonality in liquidity among stocks within countries and documented its existence using 48 national stock markets. Koch et al (2016) showed that stocks with high mutual fund ownership have more commonality in liquidity than those with low mutual fund ownership. In a large sample of 39 markets, Moshirian et al (2017)
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