Individual Stock Liquidity Research Articles

Effect of media freedom on liquidity and information asymmetry: evidence from non-U.S. stocks in the NYSE

ABSTRACT While previous studies have mainly explored the impact of media freedom on macroeconomic variables, there is a relative scarcity of research on how media freedom affects stock markets. This paper examines the relationship between media freedom and the liquidity and information asymmetry of non-U.S. stocks listed on the New York Stock Exchange by demonstrating how these factors affect the liquidity dynamics of stocks from countries with varying degrees of media freedom. Ultimately, this study reveals that non-U.S. stocks from countries with limited press freedom experience poorer market liquidity. These conclusions hold even when considering a broader concept, voice and accountability, which includes media freedom, as well as different measures of liquidity and asymmetry, which reaffirms the reliability of the results. Our research illustrates the vital significance of media freedom in enhancing the liquidity of individual company stocks and mitigating market information asymmetry, suggesting that a nation’s press freedom can profoundly influence its stock market performance.

Does Short Selling Disclosure Decrease the Liquidity of Individual Stocks?

Does Short Selling Disclosure Decrease the Liquidity of Individual Stocks?

Liquidity changes and decomposition in the Japanese equity market

In this study, we investigate the relationship between liquidity changes and stock returns in the Japanese stock market. The results confirm that stocks with increased liquidity have higher stock returns than those with decreased liquidity. This phenomenon indicates that the market under-reacts to changes in liquidity. We also decompose liquidity and analyze how each component is priced. We confirm that stock-specific long-term liquidity changes relate negatively to stock returns in the following month, while stock-specific short-term liquidity changes relate positively to stock returns in the following month. The sensitivity of changes in the liquidity of individual stocks to changes in market liquidity was found not to be priced.

Does Monetary Policy Determines Liquidity? New Evidence from Pakistan Stock Market

Monetary policy and its influence on liquidity is one of the most contentious issues in recent periods. As Pakistan is an emerging market with growing opportunities so people’ interest is increasing and investors are more concern about liquidity position of Pakistan market. This research using sample of 100 firms listed at Pakistan Stock Exchange (non-financial) for the period 2000-2020. In first step, simple regression is estimated to investigate the effect of monetary policy on market liquidity. In which the liquidity of market in month t is modeled as a function of the Industrial growth rate (IGRt), Inflation rate (INFt), market return (RMt), standard deviation (SDt) and real interest rate (INTt). In second step, in-depth investigation is encountered that how announcement of new monetary policy determines the liquidity of individual stocks listed on PSX 100 index. For that purpose, panel regressions (fixed effect model) are estimated in which the liquidity (LIQi,t) of stock i in month t is modeled as a function of the (one-month lagged) SBP’s monetary policy, the interaction term and other lagged control variables. Findings can be summarized firstly, at stock market level, results confirm that expansionary monetary policy entails more liquid stock markets. Secondly, study complement the micro analysis and find that expansionary (restrictive) monetary policy results in an increase (decrease) in stock liquidity. This study is helpful for investors in devising investment plans on the basis of assessing certain facets of liquidity like risk, return, inflation rate, trading volume.

Assessing Commonality in Liquidity: Evidence from an Emerging Market’s Index Stocks

This study investigates the degree to which movements in stock liquidity is determined by common underlying factors in a large emerging market, India. This degree is called commonality. Commonality has been measured for NIFTY50 stocks using high frequency data across a variety of liquidity measures. This study empirically verifies the relative strength of market- and industry-wide liquidity in explaining commonality. Furthermore, the study analyses the impact of industry-wide liquidity on the liquidity of individual stocks belonging to the key industries of Indian economy, viz. consumer goods and pharma, energy, financial services, infrastructure, information technology (IT) and telecom, manufacturing and natural resources. Among all the sectors studied infrastructure, IT and telecom, manufacturing and natural resources sectors possess higher degree of Industry-wide commonality. This means fund managers find it difficult in altering a portfolio having greater exposure to these sectors. Studying the behaviour of commonality will also assist regulators in monitoring abnormal market fluctuations. The study contributes to the understanding of commonality on an emerging order driven market like India.

Short-selling, margin-trading, and stock liquidity: Evidence from the Chinese stock markets

This paper examines the impacts of two forms of leveraged trading—margin trading and short selling—on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after restrictions on leveraged trading are removed. However, margin trading and short selling have opposite impacts on liquidity. During ordinary periods, margin trading benefits liquidity, whereas short selling damages liquidity; however, during market downturns, their roles are reversed. We also provide evidence suggesting that short sellers are informed traders in China and that short selling reduces stock liquidity because of the increased risk of adverse selection faced by uninformed traders.

Short-Selling, Margin-Trading, and Stock liquidity: Evidence From the Chinese Stock Markets

We study the impacts of two forms of leveraged trading, namely margin trading and short selling, on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after the restriction of leveraged trading was removed. Margin trading and short selling, however, has opposite impacts on liquidity. In ordinary time periods, margin trading benefits liquidity whereas short selling damages liquidity. However, in market downturns, their roles reversed. We also provide evidence suggesting that short sellers are informed traders in China and short selling reduces stock liquidity due to the increased risk of adverse selection faced by uninformed traders.

Commonality in liquidity: Evidence from India’s National Stock Exchange

This article investigates commonality in liquidity on India’s National Stock Exchange (NSE) using high frequency limit order book data. The analysis pertains to 50 mid-cap stocks for the period April–July 2015. A comprehensive record of more than 100 million orders and trades is aggregated at 30 min intervals to construct a variety of spread and depth measures of liquidity. The empirical analysis shows that individual stock liquidity co-moves to a high degree with market liquidity and industry liquidity. Market-wide commonality is found to be stronger than industry-wide commonality for most liquidity measures. Commonality is further found to be greater in heavy manufacturing than in consumer goods, financial services, or infrastructure sectors. For most stocks, up markets show a stronger degree of commonality than down markets. Finally, short-run commonality is found to exceed long-run commonality, which suggests greater presence of noise traders in short run.

Interdependence between Monetary Policy and Stock Liquidity: A Panel VAR Approach

This article examines the relationship between monetary policy and individual stock liquidity in an order-driven emerging stock market like India. This study considers stocks listed in National Stock Exchange of India (NSE) and continuously traded from April 2002 to March 2015. Considering the multiple dimensions of liquidity, this study uses five different liquidity proxies to capture the various facets of liquidity such as trading activity, price impact and transaction cost. An array of macroeconomic and firm-specific control variables are used while analysing the liquidity and monetary policy relationship. Econometric methods like panel vector autoregressive (VAR)–Granger causality test, impulse response functions and variance decomposition analysis have been employed to carry out this analysis. The empirical findings suggest that monetary policy significantly Granger-causes stock liquidity, and the expansionary monetary policy characterised by low interest rate and higher money supply is positively associated with individual stock liquidity in India. The impact of monetary policy on liquidity of individual stocks is more prominent during financial crisis. The findings of the present study have certain theoretical as well as practical implications. The market participants in equity market can improve the forecasting of liquidity of their investment portfolio by employing monetary policy along with individual asset’s characteristics. Regulators and policymakers may consider the cross-sectional relationship between stock liquidity and monetary policy as an important source of information for policy formulation and implementation. JEL Classification: E44, E51, G12

Inter-rater Reliability of Movement Quality During Single Limb Mini-Squat Test in Adults with Knee Osteoarthritis

This article investigates commonality in liquidity on India’s National Stock Exchange (NSE) using high frequency limit order book data. The analysis pertains to 50 mid-cap stocks for the period April–July 2015. A comprehensive record of more than 100 million orders and trades is aggregated at 30 min intervals to construct a variety of spread and depth measures of liquidity. The empirical analysis shows that individual stock liquidity co-moves to a high degree with market liquidity and industry liquidity. Market-wide commonality is found to be stronger than industry-wide commonality for most liquidity measures. Commonality is further found to be greater in heavy manufacturing than in consumer goods, financial services, or infrastructure sectors. For most stocks, up markets show a stronger degree of commonality than down markets. Finally, short-run commonality is found to exceed long-run commonality, which suggests greater presence of noise traders in short run.

The liquidity of the London capital markets, 1825–70†

AbstractThis article examines the liquidity of the London capital markets in the decades following the liberalization of UK incorporation law. Using comprehensive stock and bond data, we calculate a measure of market liquidity for the period 1825–70. We find that stock market liquidity trended upwards but bond market liquidity did not increase over the sample period. Stock market liquidity during our sample period was partially influenced by the bond market, rather than fluctuations in economic output. In our analysis of the cross‐sectional determinants of individual stock liquidity, we find that firm size and the number of issued shares were important determinants of liquidity. Finally, we find little evidence of an illiquidity premium, which is consistent with the view that investors did not price liquidity in this nascent market.

The Effect of Liquidity Risk on Stock Returns: The Case of Amman Stock Exchange during (2004-2013)

This study examines the effect of individual stock liquidity on its rate of return for the companies listed in Amman Stock Exchange over the period (2004-2013). Our date consists of daily observations of a sample of 30 companies have been selected on a certain filtering process. Fixed effect panel regression analysis is used for estimation purposes. The results of the study show a highly significant effect of liquidity on stock returns. The results also indicate that all the liquidity proxies that have been used in this study including (absolute bid-ask spread, proportional bid-ask spread, volume, dinar volume, turnover, Amihud (2002) illiquidity ratio, depth, dinar depth) show statistically significant effect on individual stock returns for the companies listed in ASE over the study period. Amihud (2002) Illiquidity ratio and turnover rate have the most dominant effect.

Determinants of tracking error in German ETFs – the role of market liquidity

Purpose – The purpose of this paper is to contribute to a better understanding of the impact of market liquidity on the daily tracking error of exchange-traded funds (ETFs). It puts a special focus on the liquidity cost of individual underlying stocks as well as the process of creation/redemption of ETF shares as key determinants of tracking ability. Design/methodology/approach – The study is based on daily observations of fund data for eight fully replicating German equity ETFs for July 2001-October 2013. A regression model with fund fixed effects is chosen to determine the effect of liquidity cost, creation/redemption and other control variables on daily tracking error. Data were compiled from issuer websites and Datastream. Proprietary XETRA Liquidity Measure, which was used as proxy for liquidity cost was supplied by Deutsche Börse. Findings – The study finds daily tracking error to significantly depend on the liquidity of underlying stocks. This finding emerges even though the ETFs in this study predominantly use in-kind creation/redemption. Even after controlling for creation/redemption, the liquidity impact remains basically unchanged. One reason might be imperfect replication of index weights: Either the in-kind-basket delivered in the course of creation/redemption does not perfectly match the benchmark-weights or the internal rebalancing of weights causes liquidity cost. Originality/value – To the best of the authors’ knowledge, this is the first paper that uses a specific liquidity measure for each single stock underlying an ETF. The findings extend the literature by corroborating the view that liquidity of individual stocks in the underlying portfolio has an impact on tracking error.

P.1.e.020 Adult onset hyperthyroidism enhances LTD and up-regulates p38-MAPK and PP1 expression in rat hippocampus

This study examines the effects of systematic liquidity risk on stock returns in the Australian market. We find that liquidity risk, in the form of (i) the co-movement between individual stock liquidity and market liquidity, (ii) the co-movement between stock returns and market liquidity, and (iii) the co-movement between stock liquidity and market returns, is priced individually and jointly in Australian equities. The results are robust to the use of alternative liquidity proxies and after controlling for other factors known to affect stock returns. The analysis across different market conditions shows that the net liquidity risk is approximately eight times higher in bearish markets than in bullish markets. Our overall results support the importance of liquidity risk in the generation of stock returns, particularly during market downturns.

Some Hypotheses on Commonality in Liquidity: New Evidence from the Chinese Stock Market

ABSTRACTIn this article, we examine four specific hypotheses relating to commonality in liquidity on the Chinese stock markets. These hypotheses are (1) that market-wide liquidity determines liquidity of individual stocks; (2) that liquidity varies with firm size; (3) that sectoral-based liquidity affects individual stock liquidities differently; and (4) that commonality in liquidity has an asymmetric effect. Drawing on a two-year data set on the Shanghai and Shenzhen stock exchanges comprising over 34 million and 48 million transactions, respectively, we find strong support for commonality in liquidity and a greater influence of industry-wide liquidity in explaining liquidity of individual stocks. Moreover, our results suggest that of the three main sectors—financial, industrial, and resources—the industrial sector’s liquidity is most important in explaining individual stock liquidities. Finally, we do not find any evidence of size effects and document an asymmetric effect of market-wide liquidity on liquidity of individual stocks.

Investor heterogeneity and commonality in stock return and liquidity

This paper examines how the trading activities of different investor types are related to common return and liquidity movements. Using a unique dataset, we decompose the daily return and liquidity of individual stocks into price impact components attributable to trades of institutional investors and retail investors. We then investigate the variation of each component relative to market-wide return and liquidity. We show that institutional trades contribute more than retail trades to liquidity commonality. However, retail trades contribute more strongly to return co-movement. The incremental contribution of retail trades to the co-variability of stock returns is more pronounced for firms with high information asymmetry.

Commonality in liquidity in emerging markets: Another supply-side explanation

Emerging markets share many distinct features that separate them from more developed markets, including low liquidity and high commonality in liquidity. This study on 18 emerging markets finds that individual stock liquidity is more affected by systematic volatility than by idiosyncratic volatility, suggesting that higher commonality in liquidity in emerging markets could be caused by higher co-variation in stock volatility and co-variation in inventory risk. Consistent with this conjecture, commonality in liquidity is found to be positively related to co-movement in volatility, and negatively related to the level of development of the financial markets. This study also documents that liquidity co-movement across emerging markets has a strong geographic component and is related to a correlation in market-wide volatility. The results do not support the presence of a global liquidity factor, and suggest that liquidity risk can be diversified by constructing global portfolios.

The Influence of Earnings Quality and Liquidity on the Cost of Equity

This study uses sample companies listed in Taiwan Stock Exchange and GreTai Securities Market during 2000 to 2011 to investigate the influence of earnings equality and liquidity on the cost of equity. We define discretionary accruals with three measures and real earnings management with three measures as indicators of earnings quality; trading volume, individual stock liquidity and market liquidity as liquidity measures and individual stock and market liquidity risk as liquidity risk measures. Panel data is suggested for this analysis. Firms manipulating discretionary accruals increase in the cost of equity, but ones operating real earnings management decrease in it when considering that the earnings quality and liquidity directly impact on it. The cost of equity is indirectly influenced by earnings quality and liquidity through information asymmetry measured by bid-ask spreads. The results show that no matter firms engaging in discretionary accruals or real earnings can decrease the cost of equity under higher levels of information asymmetry. The higher the trading volume or the individual stock liquidity risk, the lower the cost of equity when information asymmetry is low.

STOCK LIQUIDITY AND CORPORATE BOND YIELD SPREADS: THEORY AND EVIDENCE

AbstractWe examine the impact of individual stock liquidity on corporate bond yield spreads in the U.S. market. By extending the endogenous‐default model to include stock liquidity in the calculation of bond value we show that a drop in stock liquidity will increase the firm's credit risk by increasing the firm's default boundary, leading to an increase of the credit spread. Our model is consistent with the sharp increase in credit risk premiums and the “yield spread spike” phenomenon in corporate bond markets during the financial crisis. We present empirical evidence supportive of our model.

Liquidity commonality and pricing in UK equities

We investigate the pricing of systematic liquidity risk in UK equities using a large sample of daily data. Employing four alternative measures of liquidity we first find strong evidence of commonality in liquidity across stocks. We apply asymptotic principal component analysis (PCA) on the sample of stocks to extract market or systematic liquidity factors. Previous research on systematic liquidity risk, estimated using PCA, is focused on the US, which has very different market structures to the UK. Our pricing results indicate that systematic liquidity risk is positively priced in the cross-section of stocks, specifically for the quoted spread liquidity measure. These findings around the pricing of systematic liquidity risk are not affected by the level of individual stock liquidity as a risk characteristic. However, counter-intuitively, we find that the latter is negatively priced in the cross-section of stocks, confirming earlier research.