Equity Market Liquidity Research Articles

COVID‐19 intensity across U.S. states and the liquidity of U.S. equity markets

AbstractWe study the effects of COVID‐19 intensity on equity market liquidity across U.S. states. We exploit cross‐sectional variation in cases and deaths to investigate any association with the deterioration of stock liquidity of firms whose headquarters or operations are in the corresponding state(s). Our motivation stems from several underlying economic channels such as order processing costs, inventory costs, and adverse selection costs. We find strong negative relations between pandemic intensity and various intra‐day liquidity measures. Our results are more pronounced for firms operating in states with more stringent containment and health measures and within industries with greater risk exposure.

Impact of government policy responses of COVID-19 pandemic on stock market liquidity for Australian companies.

This study investigates the impact of government policy responses of COVID‐19 pandemic on stock market liquidity for listed Australian companies and for 11 different industries separately. A quantitative deductive approach is used for a sample of 1,452 companies with a total of 292,164 firm‐day observations over a period from January 25, 2020 to December 31, 2020 during the outbreak of COVID‐19. Univariate and multivariate (two‐way cluster‐robust panel regression) analysis were conducted. Data were collected from the Oxford COVID‐19 Government Response Tracker, Worldmeter, Refinitiv Workspace and Datastream. Our findings indicate that the influences of the six out of seven stringency policy responses reduced Australian equity market liquidity. However, public information campaigns enhanced market liquidity and hence trading activity. Among the 11 industries, our analysis shows that the non‐pharmaceutical interventions by the Australian government have significant and positive effects on four industries: Consumer non‐cyclicals, healthcare, financial and technology. However, the worse effects were depicted in the industrial (transportation) and energy industries. This study is important for investors, policymakers and regulators to understand the diverse effects of government policy responses of COVID‐19 on stock market liquidity to enhance financial stability. Moreover, understanding this effect is particularly important to decision‐makers such as portfolio and fund managers to manage their portfolios and trading activities during extreme turbulence times, such as COVID‐19. Unlike previous studies that focus on country analysis, this study examines on firm basis the impact of government interventions on stock market liquidity in a well developed Australian stock market.

Spread determinants in corporate bond pricing: The effect of market and liquidity risks

This paper investigates the effect of market and liquidity risks on corporate bond pricing in Turkey, an emerging market, and in Europe. Results show that corporate bond returns have exposure to liquidity factors and not to market factors in both settings. Corporate bonds issued in Turkey have significant exposure to fluctuations in benchmark treasury bond liquidity and corporate bond market liquidity; while corporate bonds issued in Eurozone have exposure to equity market liquidity and are sensitive to fluctuations in a 10-year generic government bond liquidity. The total estimated liquidity risk premium is 0.7% per annum for Turkish ?A? and above graded corporate bonds, and 1.08% for the last investment grade level (BBB-) long-term bonds. For Eurozone, the total liquidity risk premium is 0.27% for investment grade 5-10 year term bonds, 1.05% for high-yield 1-5 year term bonds and 1.02% for high-yield 5-10 year term category.

Herding and equity market liquidity in emerging market. Evidence from Vietnam

This paper focuses on investigating the relation between herding and liquidity in Vietnam stock market, an issue which captures less intention in the current literature. We use daily prices and daily trading volume of all stocks traded on the Ho Chi Minh City stock exchange over 13 years. The finding confirms the existence of herd propensity in Vietnam equity market during the period studied. More importantly, the results reveal significant evidence of herding asymmetry conditional on the average market liquidity. The herd behavior is more pronounced for high and medium liquidity stocks. Furthermore, we find anecdotal evidence supporting the bilateral effects between herding and market liquidity.

Does the Market Know? Going Concern Opinion Release and Firm Fundamentals

Using a significant auditing event-the going concern audit opinion-we investigate the market’s forecasting ability and the importance of firm fundamentals in predicting the going concern event. First, we find that the equity market signals the upcoming going concern announcement as early as 30 days in advance. Specifically, during the window of [-30, -1] leading up to the announcement, the excess returns to going concern firms are 9.98% worse than the matched distressed firms. Moreover, short sellers, a group of sophisticated investors, significantly increase their shorting activities during days before the release of the going concern opinions. Furthermore, we find that firm fundamentals, which are observable to the market, are significantly predictive to the issuances of going concern. These variables include a firm’s operating performance (return on assets and operating cash flows), equity market liquidity, stock momentum, and filing delay. Overall, our evidence supports the perception that the market can forecast the going concern opinion release and points out its possible channel as well.

Does it pay to be forthcoming? Evidence from CSR disclosure and equity market liquidity

AbstractWe examine the impact of corporate social responsibility (CSR) disclosure strategies on equity market liquidity. Using data on CSR disclosure from Bloomberg, we find that equity market liquidity improves as firms increase their CSR disclosure transparency. Specifically, firms with more transparent CSR disclosure strategies have narrower spreads and exhibit improvements in common measures of equity market liquidity. Additionally, we document that improvements in equity market liquidity occur contemporaneously with changes in firms' CSR disclosure strategies, suggesting that markets respond to the transparent disclosure of CSR initiatives without necessarily knowing the ultimate efficacy of the initiative itself. We condition our findings on firm transparency and provide evidence that CSR disclosure transparency acts to reduce information asymmetry, thus acting as the mechanism to improve equity market liquidity. Overall, our results suggest that CSR disclosure transparency leads to reductions in asymmetric information, ultimately making financial markets more equitable.

Peran Market Timing Ekuitas, dan Strategi Korporasi dalam Menentukan Struktur Modal Perusahaan

The purpose of this study is to corporate strategies in terms of liquidity and growth is expected to increase the confidence of shareholders upon issuance of equity so that the firm has a low capital structure. Population data used are the financial statements of the companies listed in the Index IHSG period 2009-2017. The results of the analysis of the data rights issue period 2010-2016 shows that the equity market timing and capital structure is not supported. The test results influence the interaction between equity market timing and liquidity to capital structure shows that the higher of liquidity of the company has higher leverage. Meanwhile, companies that issue stock when prices are high and have a high asset growth, the company has a capital structure that is low as high.

Does It Pay to Be Forthcoming? Evidence from CSR Disclosure and Equity Market Liquidity

We examine the impact of corporate social responsibility (CSR) disclosure strategies on equity market liquidity. Using data on CSR disclosure from Bloomberg, we find that equity market liquidity improves as firms increase their CSR disclosure transparency. Specifically, firms with more transparent CSR disclosure strategies have narrower spreads and exhibit improvements in common measures of equity market liquidity. Additionally, we document that improvements in equity market liquidity occur contemporaneously with changes in firms’ CSR disclosure strategies suggesting that markets respond to the transparent disclosure of CSR initiatives without necessarily knowing the ultimate efficacy of the initiative itself. We condition our findings on firm transparency and provide evidence that CSR disclosure transparency acts to reduce information asymmetry thus acting as the mechanism to improve equity market liquidity. Overall, our results suggest that CSR disclosure transparency leads to reductions in asymmetric information, ultimately making financial markets more equitable.

MiFID II and Equity Market Liquidity, or There and Back Again

This article examines the impact of MiFID II on European equity market liquidity. MiFID II eliminated broker crossing networks, introduced caps on dark trading, and brought about new types of venues. The authors investigate the changes in the market in the lead-up to the January 3, 2018, implementation date and the early evidence supporting the expected liquidity shift toward block networks, periodic auctions, and systematic internalizers. Although all signs indicate limited change for end-investors, the delay in implementation of the double-volume caps means it is too early to fully assess the impact on trading costs. <b>TOPICS:</b>Exchanges/markets/clearinghouses, developed

Uncovered Interest Rate Parity, Carry Trade, and Country Equity Return Differentials

This paper applies a mixed effect model to investigate the relationship between international equity returns and forward discount sorted currency returns from three base currencies (i. e., US dollar, euro, and pound sterling). Empirical results using the portfolio approach show that high-interest rate currencies co-move positively while low-interest rate currencies co-move negatively, suggesting that foreign equity excess returns can help to explain investment in currency markets, providing a partial resolution to the uncovered interest parity conundrum. Furthermore, we show that global equity market returns, volatility, and liquidity correlate well with currency returns.

From finance to marketing: Initial public offering ownership overhang and marketing in the hospitality industry

Hospitality firms spend significant amounts on marketing activities post-IPO. It is critical to understand the driving force behind these firms’ aggressive marketing strategies. This study examines the impact of Initial Public Offering (IPO) overhang on the marketing activity of newly public firms in the U.S. hospitality industry. IPO overhang measures the ownership retained by pre-existing shareholders who are mostly corporate insiders. Our results indicate that IPO overhang is positively associated with post-IPO marketing intensity up to three years post-IPO. Further, the marketing activity by newly public firms is associated with higher equity market liquidity, consistent with the view that marketing activity promotes equity market liquidity and thus facilitates insiders’ exit. Our findings provide an avenue for IPO firms to manage the negative price impact of corporate insiders’ cash-out, and a partial explanation for newly public firms’ aggressive investments in marketing.

The Influence of Cross-Border Cooperation on Equity Market Liquidity

This paper examines how cooperation between national securities regulators affects equity market liquidity, using the International Organization of Securities Commissions’ (IOSCO’s) Multilateral Memorandum of Understanding (MMoU) as a shock to cooperation. The MMoU was set up to protect investors by fostering cooperation between regulators, and fill gaps in cross-border regulatory capacities that historically exposed investors to information asymmetry, agency costs, and expropriation risks. Consistent with a deterrent effect, I find that when a regulator enters the MMoU network, the markets it supervises experience enhanced liquidity, as indicated by narrower quoted bid-ask spreads. Incremental to this effect, I find larger liquidity improvements in when linkages are formed between the precise regulators that co-supervise a firm affiliated with both markets. Cross-sectional tests show that legal, cultural, economic, and firm-level attributes condition the effect; these results shed light on how cooperation works and what makes it effective. Coordination is one way that regulators who are grappling with the interjurisdictional complexities of increasingly interconnected markets can protect investors and enhance liquidity.

Herding and Equity Market Liquidity: Evidence from Vietnam

This paper focuses on investigating the relation between herding and liquidity in Vietnam stock market, an issue which is paid less intention in previous studies. We use stock prices and trading volume over the period from 2005 to 2017 as the data set to measure herding and liquidity, respectively. The finding indicates the presence of herd behavior in Vietnam stock market during the period studied. Moreover, the results reveal significant evidence of herding asymmetry conditional on the average market liquidity but more pronounced for high and medium liquidity stocks. In addition, there is empirical evidence supporting the two-way directional effect of herding and market liquidity. The results also robust when we split the data into three sub-periods including pre-crisis, during crisis and post-crisis periods.

Trader Leverage and Liquidity

ABSTRACTDoes trader leverage drive equity market liquidity? We use the unique features of the margin trading system in India to identify a causal relationship between traders’ ability to borrow and a stock's market liquidity. To quantify the impact of trader leverage, we employ a regression discontinuity design that exploits threshold rules that determine a stock's margin trading eligibility. We find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders’ contrarian strategies. Consistent with downward liquidity spirals due to deleveraging, we also find that this effect reverses during crises.

Hedge funds as international liquidity providers: evidence from convertible bond arbitrage in Canada

We examine the impact of Canadian convertible bond issuance on equity market liquidity. Using issuance event dates between April 2002 and March 2011, we analyze the change in short interest and stock liquidity during a 1-year event window. We consider mainstream liquidity measures, including turnover, dollar volume, dollar spread, percentage spread, and the ratio of daily absolute stock return to dollar volume. We find that after convertible bond issuances, there are significant increases in short interest, but minimal overall improvements in liquidity. The change in liquidity is not significantly related to the change in short interest, except for the firms with large change in short interest. Interpreting increased short interest after issuance as a proxy for convertible bond arbitrage activity, the results suggest that there is limited positive liquidity externality of hedge fund activity in Canada.

An Asset Pricing Approach to Liquidity Effects in Corporate Bond Markets

We use an asset pricing approach to compare the effects of the liquidity level and liquidity risk on expected U.S. corporate bond returns. Using signed transaction data, we estimate effective transaction costs for bond portfolios by a repeat-sales method. We find that the liquidity level and exposure to equity market liquidity risk affect expected bond returns. In contrast, exposure to corporate bond liquidity shocks carries an economically negligible risk premium. A simulation study shows that it is unlikely that our results are driven by measurement error in betas or multicollinearity.We present a simple theoretical model that explains these findings.

The Impact of Foreign Investor Trading Activity on Vietnamese Stock Market

The empirical research examines the impact of net purchase of foreign investors on performance of stock market and market liquidity. In this study, market performance is proxied by VN-index, which measures growth of equity market and market liquidity is estimated by the trading volume of whole market. The data is collected in Vietnamese Stock Exchange in the period of 1215 intraday from 2011 to 2014. By using ARCH model, main findings of this research are: first, there is positive relationship between market performance and net purchase; second, performance of stock market is influence by lag factor and third, liquidity of market is affected negatively by trading activity of foreign investors.

Herd behavior and equity market liquidity: Evidence from major markets

This paper provides new evidence on the relation between herd behavior and equity market liquidity, an issue that has been neglected when it comes to studying herd behavior towards the consensus. We use equity price data for the G5 markets, and initially find no evidence of herding. When, however, we condition on the liquidity of stocks we find significant evidence of herd behavior for high liquidity stocks, for most countries, a result robust to different definitions of the crisis period and different measures of liquidity. The only exception is Germany for which there is weaker evidence of herding in high liquidity stocks. Variance decomposition tests indicate that the variance of the average equity market liquidity is affected by return clustering, especially during the crisis and post-crisis period an effect that is more pronounced for the US market.

Liquidity Risk and Time-Varying Correlation between Equity and Currency Returns

Using data on twenty major OECD countries over time, this paper documents a new evidence on real equity and real currency prices: higher real returns in the home equity market relative to foreign counterparts are generally associated with real home currency depreciation at a monthly frequency, but this negative correlation breaks down or even reverses during times of relatively higher aggregate economic uncertainty or volatility. This paper also proposes one plausible explanation for this time-varying correlation structure. The suggested model is based on a long-run risks type model, combined with time-varying liquidity risks in stock markets. With recursive preference for the early resolution of uncertainty and a negative link between the level of short-run economic growth and equity market liquidity volatility, the model demonstrates that severe short-run economic uncertainty overturns the otherwise negative link between the real currency and real relative equity returns.

The Market Liquidity Timing Skills of Debt‐oriented Hedge Funds

ABSTRACTWe investigate the liquidity timing skills of debt‐oriented hedge funds following the 2008 credit crisis, which demonstrated the importance of understanding liquidity conditions to manage the market exposure of investments. We base the analysis on the estimated co‐movements of fixed income and equity market liquidity. Our findings, which are statistically robust, show evidence of liquidity timing ability in the fixed income market for all debt‐oriented hedge fund strategy categories. Joint market liquidity timing skill, however, is only found in some categories. Our findings suggest that debt‐oriented hedge fund managers use a sophisticated set of timing strategies in their investment managements.